McGonigle's quandary raises a good question for others considering public ownership: Should you wait until you meet the requirements of the Nasdaq's so-called SmallCap Market or National Market System before going public? Or can you survive and prosper on the OTC Bulletin Board?
The answer is that the Bulletin Board might be an ideal proving ground, but ultimately, entrepreneurs who want to create an embarrassing horde of riches will have to move up in the world.
To understand why this is so, entrepreneurs must first understand a little bit more about the structure of the Over-The-Counter market. In general, it's divided into four tiers. The first three tiers--the Nasdaq National Market, the Nasdaq SmallCap Market and the OTC Bulletin Board--have automated quotation (the "aq" in Nasdaq) and execution systems that are owned and operated by The Nasdaq Stock Market Inc. Nasdaq, in turn, is owned by the National Association of Securities Dealers Inc. (NASD), which is the self-regulating body established by the securities industry to avoid direct regulation by the feds. Got that? (The fourth tier of the Over-The-Counter market has no automated distribution of quotes, and trading information for companies that trade at that level can be found only in a publication known as the Pink Sheets, giving rise to the name "the Pink Sheet market.")
The Nasdaq National Market is where the Intels, Microsofts and Ciscos of the world trade. The SmallCap market attracts up-and-comers--all of whom are grooming themselves to move up to the Nasdaq National Market. The OTC Bulletin Board was formed in 1990 to give companies that could not trade on the SmallCap Market or the National Market (because of their size or because their shares were not registered under certain U.S. Securities and Exchange Commission laws) a market to trade on with automated quotation, trading and visibility among investors, according to Nasdaq's Wayne Lee.
It shouldn't be surprising that the major brokerage firms focus most of their attention on the upper tiers of the OTC market. This reality creates significant challenges for the denizens of the lower tiers, as described below.