Definition, Risks, and Company Types for Smart Investing

The Pink Open Market, or OTC Pink, is a speculative marketplace for trading stocks not listed on major exchanges. Instead, the Pink market supports over-the-counter trading, involving direct transactions between parties instead of through a centralized exchange.

A key difference from major exchange, there is a lack of disclosure requirements on the OTC Pink. As result, these trades high risk and only risk-tolerant investors should participate in trading. Typical companies on OTC Pink include those in financial distress, foreign entities, or new companies.

While not heavily regulated, in 2021, securities once labeled “No Information” were moved to OTC Market Group’s Expert Market, which is not available to the general public. All investors should perform due diligence and informed decision-making when considering investments in the OTC Pink Market.

Understanding the OTC Pink Market: Trading Dynamics and Structure

The over-the-counter (OTC) market is a decentralized market where securities, not listed on major exchanges, are traded directly by a network of dealers. Instead of providing an order-matching service like the NYSE, these dealers carry inventories of securities to facilitate any buy or sell orders. Since the information was originally printed on pink paper, OTC Pink is also called Pink Sheets.

The OTC Pink, as well as its companion tiers, OTCQX and OTCQB, is run by OTC Link. The link is an electronic inter-dealer quotation and trading system developed by OTC Markets Group. Registered with the SEC as a broker-dealer, OTC Link is also an alternative trading system (ATS).

OTC Link lets broker-dealers post and share quotes and negotiate trades using its electronic messaging system. This feature enabled it to replace the Over-the-Counter Bulletin Board (OTCBB), which was a quotation-only system.

On November 8, 2021, the Financial Industry Regulatory Authority (FINRA) chose to discontinue the OTC Bulletin Board (OTCBB), a quotation system it operates between dealers, and remove all OTCBB-associated rules from its rulebook.

OTC Pink Marketplace Regulation: What Investors Need to Know

Due to their self-reporting nature, OTC Pink companies are classified by the quality and amount of information they provide. They are classified as follows.

• Current Information companies are those that follow the International Reporting Standard or Alternative Reporting Standard. These companies make filings publicly available through the OTC Disclosure & News Service.
• Limited Information companies include troubled firms in financial distress, bankruptcy, or those with accounting issues. This category also includes companies that are unwilling to meet the OTC Pink Basic Disclosure Guidelines.

The Pink Open Market previously had a category of No Information securities, which identified companies with the lowest level of disclosure—those that had not filed any information with either the SEC or the OTC Disclosure and News Service in six months. Such securities were considered highly risky for investors. In 2021, following updated SEC transparency rules, securities that were once labeled “No Information” moved to OTC Market Group’s Expert Market, which is only available to broker-dealers and other professional investors, not to the general public. They are not promoted as investment options for average investors. 

All broker-dealers trading on OTCQX, OTCQB, and OTC Pink must be members of the Financial Industry Regulatory Authority (FINRA). Further, they must register with the SEC and are subject to state securities regulations. In this way, as with exchange-traded securities, investors trading OTC securities are protected from an unethical broker-dealer’s illegal practices by the same SEC and FINRA rules, such as Best Execution, Limit Order Protection, Firm Quotes, and Short Position Disclosure.

Evaluating the Suitability of OTC Pink Investments

OTC Pink provides for transparent trading and best execution, although there are no financial standards or disclosure requirements. The marketplace trades a wide range of domestic and foreign companies , including penny stocks, shell companies, distressed companies, and dark companies that cannot or will not provide company information to investors.

Because of the lack of reporting requirements, only professional and sophisticated investors with a high risk tolerance should trade here. Investors should perform all the proper due diligence by researching the companies they are considering and reviewing all business activities.

Evolving Terminology and Practices in the OTC Pink Market

“Pink Sheets” or “OTC Pink” are considered outdated in today’s financial markets. The terminology that was once known as Pink Sheets has evolved into the OTC Markets Group, which operates regulated marketplaces for trading over-the-counter stocks. These include the OTCQX, OTCQB, and Pink markets, each with varying levels of financial standards and regulatory oversight. Thus, referring to these markets collectively as “Pink Sheets” or “OTC Pink” is no longer accurate. However, terms like PINK or Pink market are still used in everyday language, as noted in the 2022 Market Data Annual Review.

The Pink market operates as an open marketplace with no obligatory financial standards or disclosure requirements. Companies in this tier are not mandated to register their stock with the SEC. These companies are divided into categories—current, limited, or no public disclosure—based on the amount and timeliness of information they share with investors.

The Pink market’s regulatory structure has evolved recently, moving components like “dark securities” out of the market entirely.

Final Insights on Investing in OTC Pink

The Pink Market differs from major stock exchanges like the NYSE and NASDAQ in terms of trading practices and regulatory oversight. There are significant risks associated with investing in the OTC Pink Market, such as high volatility, low liquidity, and potential for fraud or manipulation. Due to the lack of financial standards and disclosure requirements, OTC Pink is most suitable for sophisticated investors with a high risk tolerance.

The 2021 SEC regulatory changes included increased transparency, such as the reclassification of “dark securities” to the Expert Market. It’s critical that investors perform due diligence by thoroughly researching companies and reviewing all business activities before trading in the OTC Pink Market.