The Pink Sheets: Where the bad boys go after PINKY gets done with them: "New Rules May Mean Trouble For OTC Bulletin Board Firms
By JASON ANDERS
THE WALL STREET JOURNAL INTERACTIVE EDITION
A move to clean up the OTC Bulletin Board by requiring the small
companies quoted there to disclose basic financial information has left the
companies scrambling to comply, and investors in a bind.
The first phase of the plan, which is being
implemented by the National Association of
Securities Dealers over the next year, begins
July 1. Companies that fail to comply will be
dropped from the OTC Bulletin Board, and the NASD says that so far,
two-thirds of the 94 companies facing the first deadline don't meet the
eligibility requirements. By the time the plan is fully implemented, half the
6,700 OTC Bulletin Board companies could be booted. (The NASD also
operates the Nasdaq Stock Market.)
A place on the OTC Bulletin Board is important because the service --
along with its updated stock quotes readily available on the Internet -- has
helped many otherwise unknown companies attract legions of shareholders
and achieve heavy trading volume. Without the OTC Bulletin Board, price
quotes would be harder to find, and volume -- and potentially stock prices
-- could drop dramatically.
Many OTC Bulletin Board companies find themselves in a difficult
position: trying to calm investors worried over the new eligibility rules,
while at the same time facing what regulators say is an insurmountable
challenge to file the paperwork and win approval before July 1.
Many investors didn't know American
Benefits Group was facing eligibility trouble
until some postings on an Internet message
board noted that an "E" had been appended
to the company's stock symbol -- a
designation used by the NASD to identify companies that are within 30
days of being dropped.
The company, which was once involved in viatical settlements but now
says it operates an Internet shopping mall and several mining operations in
Madagascar, issued a press release June 4 assuring investors that it was
"committed to file the documents on June 11" and maintain its place on the
OTC Bulletin Board. (Viatical settlements let terminally ill individuals
collect a portion of their life-insurance benefits before they die.)
But as of Friday, the Deerfield Beach, Fla., company still hadn't filed with
the U.S. Securities and Exchange Commission. "Actually, we said the
soonest we could do it was June 11," Jerry G. Mikolajczyk, American's
chief executive, said in an interview. "At this time we won't be able to
comment on the exact date. Our official stance is no comment on
everything."
But even if American Benefits Group had mailed the filings when promised,
it still would have been dropped from the OTC Bulletin Board. That's
because the SEC gets a 60-day comment period before the filings go into
effect, and a company's eligibility could be delayed significantly if the SEC
has questions about the filing -- facts that some OTC companies failed to
mention when they assured investors they would meet the deadlines.
"It's not realistic to think that in 30 days or even 60 days these companies
could get the necessary filings together," says Adena Friedman, director of
trading and market services for Nasdaq. "If these companies didn't start
working on this several months ago, there's no way they're going to make
it."
Ms. Friedman admits that investors could have difficulty unloading stock in
companies that are dropped from the OTC Bulletin Board. "We've been
telling people this was happening since January, and I think the companies
bear the responsibility here for what happens in the trading of their stock,"
she says.
Many of the companies that become ineligible will likely move to the Pink
Sheets, a daily publication of quotations distributed by National Quotation
Bureau Inc., New York. NQB plans to launch an online, real-time version
of the Pink Sheets in mid-July, but those quotes will be accessible only on
a subscription basis to brokers and market makers, and won't be directly
available to investors.
Companies are being phased into the new rules alphabetically by ticker
symbol. Only 94 securities are up for review for July 1 (65 of those are
currently scheduled to drop off), but in later months as many as 700
securities will be reviewed at once. The new rules require companies to file
a Form 10 with the SEC that contains audited financial information, and to
file quarterly financial statements.
The Internet has helped turn the OTC Bulletin Board into a popular
playground for investors looking for big returns. Lured by cheap prices --
many shares trade for less than $1 -- and volatility that can send a
company soaring 500% in a single day, investors have flocked to the
service, where average daily volume has tripled since 1995 (volume on the
larger Nasdaq doubled over the same period).
But because many of the most popular OTC Bulletin Board stocks don't
report to the SEC, investors have been left to get information on such
securities from often dubious sources, including paid stock promoters.
And the OTC Bulletin Board has also proved to be fertile ground for
investment scams -- almost all of the Internet stock-fraud cases brought by
the SEC have involved companies quoted on the OTC Bulletin Board.
"These are companies you never would have heard of before the Internet,
and in many cases that would have been a good thing," says William
McDonald, director of enforcement the California Department of
Corporations, the state securities regulator. "I hope the public understands
that these delisted securities create a road map that we're going to use to
find fraudulent companies."
To be sure, SEC filings can be burdensome for small companies. Access
Power, a Jacksonville, Fla., provider of telephone service over the
Internet, is among the companies that were certified "eligible" in this first
round.
The company began filing with the SEC before the new rule went into
effect and estimates it spent about $20,000 to complete its filings -- and
that was with minimal use of outside accountants and lawyers. "It probably
took us four or five months to get things together at first, including about
four weeks just to get the financials audited," says Glenn Smith, Access
Power's chief executive.
The company now has one full-time employee -- out of its staff of 10 --
who does nothing but deal with SEC filings. "It's a strain, yes," says Mr.
Smith. "But if you're a public company, you owe this to your investors,
period." |
