THE 15-C211 PROCESS-GETTING THE SHARES TRADING AFTER A TRADITIONAL IPO

Imagine your private company has just completed the IPO process. You file an S-1 or a Regulation A+ offering, raised money, and now have a shareholder base. However, there are two steps remaining before your stock can actually trade in the public marketplace. One of them is the filing of a 15 C-211 application.

This application is named after the Securities Exchange Act Rule 15 C-211 which prohibits any broker from initiating a quotation in an over-the-counter security unless current public information on the company is available to the public. In the ordinary course of things, a reporting company is providing the current public information if it is filing its periodic reports on time. Likewise, a company which reports on the alternative listing standard on otcmarkets.com also meets the current public information requirement.

However, if a company has never been traded before, a 15 C-211 application  must first be filed by a broker who will commit to be a market maker for the securities. The market maker has to submit the required information, with backup, to FINRA and obtain approval. This process can take a matter of weeks or months, depending on the size of the company, the quality and completeness of  the application and to some extent luck.

The application for a company which is just completed its traditional IPO includes the S-1 or Regulation A+ offering document and its amendments, all the comments from the SEC and the company’s response to those comments, and other documents including the subscription agreements and payments from the subscribers. One of the critical elements in approving a 211 application is the issue of concentration.

Concentration is not good. Concentration means that there is a possibility that the market will be controlled by  one person or small group of persons due to their overwhelming ownership of the public float. If the public flows comprised of 50 people, each with 10,000 shares, they would be no concentration because it is then deemed unlikely that a significant portion of the 50 persons would collude together to control the market; that is, they would refrain from selling or they would coordinator selling efforts in order to manipulate the trading price of the stock. On the other hand, if there were one shareholder which held a 50,000 shares and the rest of the shareholders had 500 shares, there would be a real possibility, in the view of FINRA, of concentration. That 211 would not be approved.

It should be noted that in passing that the firm submitting the 211 is not permitted to charge the company for the application. Obviously, that doesn’t make economic sense for a market maker to expend resources with no possibility of recouping its investment. Typically, the market maker enters into an investment banking agreement with the private company. One of the larger independent transfer agents gets around this issue by causing its affiliate broker-dealer to file a 211 for the company if the company will engage the transfer agent at a hugely inflated price. It appears that in 2016 the real world price of filing a 211 is $20,000.