Publicly Traded?

[Scott]

A company's stock is traded over-the-counter and listed on the NASDAQ bulletin board. Does this satisfy the definition under Treas. Reg. section 54.4975-7(B)(1)(iv) of "publicly traded" for purposes of the ESOP requirements of a put option and an annual valuation and the prohibition against a right of first refusal on ESOP stock?

I can't find any guidance on point. The closest I have found is a PLR which says that stock traded on the "pink sheets" is not "publicly traded" under that definition. However, the "pink sheet" system is not the same as the NASDAQ bulletin board.

Based only on a reading of the definition, my thought is that the bulletin board constitutes "publicly traded," but since it will affect the way the company's ESOP must be administered, I would like something a little firmer to go on, such as any sort of IRS interpretation, written or oral.

[RLL]

The Bulletin Board ("BB") is a quotation system sponsored by a national securities association (NASD)....so it appears that a stock listed on the BB would be "publicly-traded" under the 1977 ESOP loan regulations.

Note, however, that the "put option" provisions of those regulations have likely been superseded, in part, by the put option requirement of IRC Section 409(h)(1)(B), added to the IRC by the Revenue Act of 1978, for stock acquired by an ESOP after 1979. Section 409(h)(1)(B) uses the term "readily tradable on an established market" (rather than "publicly-traded") in referring to stock which is subject to the put option requirement.

It is not so clear that these terms will be interpreted precisely the same by the IRS. I believe that there was a PLR or Rev. Rul. published by IRS in the early to mid-1990's that may have addressed this issue.

[Guest John Nelson]

The following excerpt is taken from the Internal Revenue Manual, Handbook 7.7.1, Employee Plans Examination Guidelines, Section 410:

"The National Association of Securities Dealers (NASD) is a national securities association registered under section 15A(B). It runs the National Association of Securities Dealers Automatic Quotation System (NASDAQ). Therefore, over-the-counter stocks traded on NASDAQ are publicly traded. Stocks listed on the "pink sheets" are not publicly traded because the "pink sheets" are not a system sponsored by the NASD."

But, one thing I've never really been clear on is the difference between the "pink sheets" and the Bulletin Board -- I thought they were one in the same.

[katiejoseph]

I'm updating this thread for whoever happens to come across it in the future.  -- Notice 2011-19 clarifies when stock is readily tradable on an established market for ESOP purposes.  The reference above now appears in 4.72.4.2.8 of the IRM.

[Tegernsee]

I’m bringing this up after nearly 7 years, and I’ve never found an answer to this question.  

Are shares that are quoted on the OTC Markets Group (formerly “pink sheet” shares) considered to be “readily tradable on an established securities market” under Notice 2011-19?  Our pricing service can occasionally pick up bid and ask prices for these stocks, but their methodology is that if anyone puts out a bid price on a stock, the pricing system picks up that price, regardless of the price at which the most recent actual trade occurred.  Any thoughts on this?

[MBESQ]

To meet the definition of an “established securities market,” the OTC Markets Group must be a national securities exchange that is registered under Section 6 of the Securities Act of 1934, as amended.  The OTC Markets Group is not found on the SEC’s list of national securities exchanges.  https://www.sec.gov/rules/sro.   On another web page, the SEC indicates that the OTC is not a national securities exchange.  https://www.investor.gov/introduction-investing/investing-basics/glossary/over-counter-otc-securities
 

Note that the definition is based on the status of the trading market.  Whether the issuer of the securities sold the securities in a public offering registered under the Securities Act of 1933, as amended, or is a reporting company under the 1934 Act is not determinative. 

The definition, therefore, treats plans with OTC securities similarly to plans sponsored by private companies in many respects.