U.S. 'pink sheets' in shakeup as securities regulator looks to stamp out fraud
23/09/2021 12:00
By Michelle Price and John McCrank
WASHINGTON/NEW YORK, Sept 23 (Reuters) - As many as 2,000
companies could disappear from the off-exchange "pink sheets,"
long a favorite of retail investors, when a new rule aimed at
stamping out fraud in this notoriously risky enclave of U.S.
equities markets comes into effect next week.
The Securities and Exchange Commission (SEC) rule boosts
investor disclosures by requiring off-exchange issuers,
frequently penny-stock companies that do not meet the main
exchanges' listing standards, to make accurate, up-to-date
financial information publicly available.
Due to a loophole in the current rules, around 2,000 of the
roughly 11,000 companies quoted on the Pink Market operated by
New York-based OTC Markets Group OTCM.PK do not publicly
provide such information.
OTC Markets has been trying to spread the word and encourage
companies to get their paperwork in order, but it was still
unclear how many would do so in time for the Sept. 28 deadline,
if at all, said Daniel Zinn, the company's general counsel.
The market operator may have to remove, if only temporarily,
between 1,000 and 2,000 stocks from the Pink Market, he
estimated, meaning broker quotes will no longer be available to
investors via online retail broker platforms.
The shakeup, which comes amid a boom in retail trading, has
led some brokers including Charles Schwab/TD Ameritrade SCHW.N
and Fidelity to bar new purchases in affected stocks, causing
consternation among retail investors unsure of whether to bail
out or stay the course in the hopes that the companies comply.
While customers will be still able to sell their shares
after Sept. 28, brokers have warned of severely limited
liquidity, which usually means investors get a bad deal.
Investors still keen to dabble in companies that have not
complied may have to call up their broker for a quote.
The rule will also apply to some government and corporate
bond issuers, leading industry lobby groups to warn this week of
potential disruption to that critical funding market.
Overall, the new rule is likely to increase the cost of
trading these companies, said Zinn.
"We're in agreement with the SEC's goals of providing as
much disclosure as possible," said Zinn. Some companies,
however, prefer not to provide public financial data for a
number of legitimate reasons, or may be unable to, he continued.
For example, some companies may not want to incur the legal
cost of providing compliant paperwork, while others may not want
to promote trading in their stock.
"In those circumstances, no quotes at all may lead to more
harm than help for existing investors," said Zinn.
The SEC did not respond to a request for comment.
The Pink Market is home to an array of issuers, including
reputable foreign companies seeking a gateway to the United
States. But some are highly risky and volatile penny-stock
companies in distress, delinquency or which are simply shells.
The SEC has warned that the off-exchange market, more
broadly, is rife with fraud and manipulation.
Under the SEC's previous rules, broker-dealers had to review
a company's financials before providing quotes in its stock on
the Pink Market, unless another broker-dealer had already vetted
them. That was the case even if the initial review happened
years ago and the company had since stopped publishing financial
information. The new SEC rule ends that exemption.
"Companies are on notice to provide a certain level of
transparency for their investors or they can't be easily quoted.
That's a good thing," said Georgetown University professor Jim
Angel. "The problem is what about the companies that choose not
to disclose? Their shareholders are being punished for the
actions of the companies."
'SHOW ME THE MONEY'
A new wave of amateur investors has piled in to penny stocks
over the past 18 months, trading on low or no-fee retail broker
platforms and hyping up their positions on social media.
In August, there were 601.1 billion transactions https://datawrapper.dwcdn.net/q3K2z/2
on penny stock markets tracked by the Financial Industry
Regulatory Authority, a 130% jump compared with a year earlier,
but down from a peak of 1.9 trillion transactions in February.
Of the stocks affected by the new rule, the most popular
among investors in trading forums like Stocktwits and
WallStreetBets include the shell companies liquidating defunct
retailers Blockbuster BLIAQ.PK and Sears SHLDQ.PK .
China's Luckin Coffee Inc LKNCY.PK , which last year
de-listed from the Nasdaq following an accounting scandal, is
among the most actively traded on the broader Pink Market, OTC
Markets data shows.
Worried by broker warnings and blaming a decline in their
stock holdings on the impending rule change, some retail
investors have taken to social media to share their anxiety and
glean gossip as to whether companies will comply in time.
Executives from several affected companies have reassured
investors on Twitter that the paperwork is coming. For some
thrill-seekers, those pledges are another buying opportunity.
"Let's go, last day to buy," one Stocktwits user going by
the handle LASPit wrote on Aug. 27 before their broker began
restricting purchases in cannabis producer CannTrust Holdings
Inc CNTTQ.PK , which is mired in a legal battle over regulatory
issues.
"We are all in it till the bitter end now, no turning back!
... Please show me the money at the end of this!" a user with
the handle gottamakedatmoney replied.
(Reporting by Michelle Price in Washington and John McCrank in
New York
Editing by Matthew Lewis)
((michelle.price@thomsonreuters.com; +12026041711; Twitter:
@michelleprice36;))