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Over-the-Counter Securities Risk Disclosure

Wealthsimple Investments Inc. (“WSII”) is a registered investment dealer and member of the Canadian Investment Regulatory Organization (“CIRO”). WSII offers trading of over-the-counter (“OTC”) securities on a limited basis (see below). 

What is it?

OTC securities can refer to financial instruments (stocks, bonds, derivatives, or other securities) that are not publicly traded on a centralized stock exchange such as the Toronto Stock Exchange or the New York Stock Exchange. Instead, OTC securities are traded directly between two parties, typically through a network of dealers or brokers or outside of traditional exchanges.

WSII currently only supports trading of a limited number of stocks which trade OTC in the United States.

Why do securities trade OTC?

There are various factors that result in securities trading OTC instead of being listed on an exchange. Below are some common reasons:

  • Smaller companies that do not meet exchange listing requirements.

  • Cost-effectiveness for companies seeking lower listing and reporting fees.

  • Foreign companies seeking access to U.S. investors without the regulatory burden of major exchanges.

  • Early-stage companies that require a flexible platform to raise capital.

  • Penny stocks and highly speculative investments that don’t meet major exchange standards.

  • Limited reporting requirements which appeal to companies that want less regulatory scrutiny.

  • Delisted stocks: companies that fail to meet major exchange’s listing requirements 

Risks and considerations for trading OTC securities

It is important to understand the risks and considerations associated with investing in OTC securities. 

Lower Liquidity: OTC securities often have lower trading volumes, hence exiting a position becomes a greater challenge. This can lead to delayed fills and less favorable prices. 

Lack of Transparency: OTC securities do not comply with the disclosure requirements that exist for publicly traded securities and have less public information available. It is important to keep in mind that issuers of OTC securities are not subject to the same reporting and disclosure requirements as securities listed on major stock exchanges. 

Higher Volatility: OTC securities generally have wider bid-ask spread, hence are more volatile with greater price swings. This can lead to greater risk of large losses. 

Limited or No Market Makers: Some OTC securities may not have market makers, which makes it more difficult to execute trades. 

Limited Regulation/ Oversight: OTC securities are not subject to as stringent regulations and oversight as securities listed on major exchanges. This can lead to greater risk of exposure to fraud , market manipulation and insider trading.

Market Data Availability (Expert Market):  Market data for securities listed in the Expert Market are restricted from public viewing.  Restrictions may be based on issuer requirements, security attributes, investor accreditation and/or suitability risks. Expert market data may only be distributed to FINRA member firms, Qualified Institutional Buyers (QIBS) and accredited investors.

Trading OTC securities through Wealthsimple:

WSII currently only supports trading of a limited number of stocks which trade OTC in the United States. WSII reserves the right to add or remove support for OTC securities at any time. WSII reviews support for OTC securities based on multiple factors, including the volume or liquidity in the OTC security and the public market (or “tier”) on which it trades.

At any point in time, WSII may be unable to support trades for OTC securities if there are changes to the tier. In such cases, these securities will be marked as ‘sell only’ for a period of time and then will be completely removed from the WS platform.