COLUMN: Proposed rules would crack down on stock scams
By DAVID BAINES, Vancouver Sun
Published: Monday, December 03, 2007
VANCOUVER - If I were one of the many Vancouver promoters who has floated stock deals on the licentious U.S. over-the-counter markets, I might want to consider a new vocation, or at least a new venue.
B.C. securities regulators are making it a whole lot tougher for Vancouver promoters to bypass B.C. securities rules in the creation and promotion of companies quoted on the OTC Bulletin or the pink sheets.
Judging by the package of rules that B.C. Securities Commission officials rolled out Monday, I expect there will be a lot of promoters who will be pretty bummed out by the whole thing.
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Font:****They will most likely get their lawyers to squawk loudly, invoking all sorts of perceived attacks on the free market system. These lawyers will be glad to parrot their complaints because this business has been very lucrative for them, and they don't want to lose it.
But in my view, this market desperately needs to be reined in. It has been subsumed by greed and avarice. If anything, regulatory intervention has been long overdue.
Until now, promoters have been able to bypass the B.C. regulatory regime by selling shares under exemptions to B.C. registration requirements (usually by selling shares to close friends and family).
Once exempted from registration, these companies do not have to follow any of the rules that apply to B.C. reporting issuers. For example, they do not have to file financial statements or insider trading reports. They are essentially treated as private companies.
But they are not private companies. Typically, they register their shares for re-sale in the United States, usually through the bulletin board or the pink sheets.
These are not exchanges, they are simply quotation systems. There is very little oversight. There are no minimum financial requirements. Disclosure is minimal. News releases are not scrutinized. Trading is not monitored.
So although many of these companies are run from offices in downtown Vancouver, they manage to circumvent most of the rules that apply to Vancouver companies that, for example, trade on the TSX Venture Exchange.
This is the regulatory gap that has spawned so much stock market mayhem in Vancouver. Promoters float sham business ventures, with sham share distributions. After they register the shares for trading in the U.S, they gather them up, so they control the entire float and can easily manipulate the share price. Then they start trading on the bulletin board or pink sheets, causing much financial harm to investors and reputational damage to Vancouver.
These companies have been multiplying like fishes and loaves, alas, with none of the religious connotations. At last count, there were 700 B.C.-connected companies quoted on the U.S. over-the-counter markets, representing 70 per cent of the Canadian total.
After years of abuse, the commission is finally moving to plug this regulatory loophole and stem the flow of shoddy OTC companies. It is proposing a new regulatory regime that will essentially make all these companies B.C. reporting issuers.
The criteria for inclusion is very broad: A company will be considered an "OTC issuer" if it has an office here, or the business is administered here, or the directors are here, or the control person is here, or the promoters are here, or the majority of the public float is here, or the investor relations activities are carried out here.
Indeed, the proposed definition of an OTC issuer is so broad that the commission will probably be accused of exceeding its jurisdiction and have to fend off legal challenges. But after years of thumb-twiddling, it is refreshing to see the commission on the attack.
On Monday, commission officials held an information session at the Metropolitan Hotel. Martin Eady, the commission's director of corporate finance, didn't mince words. He told the 50-odd people in attendance that many OTC companies have sham businesses and make "ridiculous claims."
He said many professional facilitators - accountants, lawyers and geologists - "shut their eyes" to the problem. He warned that the commission would report professionals who knowingly aid and abet sham deals to their professional organizations.
Eady said many OTC companies don't have "real shareholders," rather they have "fake shareholders" who in some cases don't even know they have been listed as shareholders. They are simply stooges for the promoters.
To stop this sort of stock-rigging, the commission is proposing rules to make it illegal for seed shareholders in B.C. to sell back their stock to the promoters.
Instead, they will have to sell their shares through a broker, from an account in their own name, into the market. This will move all this share dealing from the back room into the public domain, where people can see what's going on.
Brokers will also have to comply with a whole new set of rules relating to OTC stock dealings. They must, for example, make sure they know who beneficially owns the stock before they trade it. They are also prohibited from accepting delivery of OTC stock until that delivery is approved by a designated compliance person. This will presumably curb the use of B.C. brokerages as conduits for share manipulations and money-laundering.
B.C. is the only province to propose new rules for OTC companies. There is good reason for this: B.C. is the OTC scam capital of Canada. Still, it is unusual in these days of rule harmonization to see a provincial commission go it alone in any area. The commission should be commended for putting investors first.
Of course, opponents will complain that the new rules will drive promoters to friendlier jurisdictions, such as Alberta. To these people, I say good riddance.
At the moment, these are just proposed rules. Industry participants have until Dec. 31 to file written comments. I usually worry that, in the absence of any real consumer lobby, producer interests will prevail. But I think the commission knows this problem is like the sorcerer's apprentice: if they don't deal with it, it will come back at them again, and again, and again.
dbaines@png.canwest.com
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