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."
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