This is a good proposal being pushed by the pinksheets people. Maybe it will offset their recent change in quote structure that effectively guarantees profit for MM's. I'd like to see them become transparent in quotes. If I put up a bid that is the best, it should show on their level 2 always and with the correct size. Cut the MM games also. But that's another story.
Pink Sheets Proposes Stock Promoter SEC Rule Change
Pink Sheets, LLC recently proposed that the Securities and Exchange Commission ("SEC") adopt rules mandating increased protections for investors against fraudulent activities by securities promoters and their sponsors. This proposal is likely the result of the large number of stock promoters, also know as “IR Firms,” that have popped up as a result of the internet age. It is now relatively easy for anyone to set up a website and promote a stock.
Currently, Section 17(b) of the Securities Act of 1933, entitled “Use of Interstate Commerce for Purpose of Offering for Sale” states,
“It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.” (emphasis added)
Pink Sheets is now proposing to increase the disclosure requirements of IR Firms and restrict the ability of penny stock companies and IR Firms to promote such stocks unless certain requirements are met.
Here is a general overview of the proposed rules that Pink Sheets is advocating to combat fraudulent stock promotion activities and unfair practices in the market for OTC securities:
1. Promotional materials must not just disclose that consideration was paid for the promotion but identify the promoters and their sponsors accurately, as well as provide current contact information for those entities.
2. Adequate current information regarding the issuer must be publicly available at the time the promotion takes place.
3. All securities held by promoters and their sponsors at the time the promotion takes place is restricted and cannot be sold without registration or an appropriate exemption.
4. Stock promoters must provide issuers of the stock that is being promoted with a copy of all promotional materials.
5. Promoters, their sponsors and issuers must inform transfer agents and broker- dealers that stock that is held by or on behalf of promoters and their sponsors is restricted.
Under Rule 1, Section 17(b) is expanded to include some additional information. I have noticed that there are still IR Firms that do not even comply with Rule 17(b) as currently in effect. They either don’t state how much they are receiving or give an e-mail address for you to request the information. This is clearly not in compliance with Section 17(b).
According to Rule 2, companies will have to make publicly available certain financial information. This is a great idea. I am surprised at the number of stock promoters that send out e-mails and even written materials for companies that have no publicly available financial information. If there is such information available it can be found on the Pink Sheets website at www.pinksheets.com.
Rule 3 is another good requirement since stock promoters are more prone to push a stock if they have free trading stock. If they simply disclose their holdings under Section 17(b), that is not good enough, because they have more of an incentive to “pump” a stock and then “dump” it themselves if they are holding free trading shares.
Rule 4 is a good record keeping requirement since it provides evidence of the claims made by the stock promoter or the information given to them by the company. Sometimes it is the company doing the pump and dump and the stock promoter is simply a conduit to distribute false and misleading information.
Rule 5 puts the burden on promoters, their sponsors and issuers to inform transfer agents and broker-dealers that stock that is held by or on behalf of promoters and their sponsors is restricted. This is going to be very difficult for the SEC to police, given the different schemes that phony penny stock companies and irreputable IR Firms use to to pump and dump a stock to the unsuspecting public.
Pink Sheets should be commended on its efforts to clean up the stock promotion industry. Their proposal was sent to the SEC on April 26, 2006, but the proposal has had very little comment from others. The comments that have been received, however, have been in favor of the proposal.
About the Author
Joseph B. LaRocco has represented and advised private and public companies, investment bankers and financial consultants in the area of securities investments, private placements, compliance and due diligence. He also advises Internet Service Providers ISPs and website owners. Mr. LaRocco is currently General Counsel to and a Director of NetSky Holdings, Inc. (Pink Sheets: NKYH)
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