Interesting article. No implications towards TSIG. -Dave
cbs.marketwatch.com
Net mania hits bulletin-board
stocks Confused investors often fall for
Web-driven scams
By Darren Chervitz, CBS
MarketWatch
Last Update: 12:55 PM ET Jan 8, 1999
NewsWatch
SAN FRANCISCO (CBS.MW) -- Investors searching
for the next Amazon.com or eBay are increasingly
placing their bets on stocks that trade on the lightly
regulated and little-followed over-the-counter bulletin
board market.
Even fans of the OTC-BB market, a quotation service
operated by the National Association of Securities
Dealers' Nasdaq Stock Market, believe investors often
don't realize how risky bulletin-board stocks can be.
"This is the bottom of the food chain," declared Kevin
Lichtman, president and chairman of FinancialWeb.com
(AXXS), an OTC-BB stock.
Unfortunately, many investors who
troll the online message boards for hot
tips or receive stock-touting e-mails
sent by paid promoters don't
understand the differences between
OTC-BB stocks and those listed on the
major exchanges, such as the Nasdaq
Stock Market or the New York Stock
Exchange, Lichtman said.
No requirements
Unlike stocks that trade on Nasdaq or
any of the other major exchanges,
OTC-BB issues do not have to meet
quantitative listing requirements, such
as a minimum bid price, or qualitative
standards, such as convening annual
stockholder meetings.
To be sure, some OTC-BB issues have
relatively large operations, such as
Hanmi Bank Los Angeles (HNBK),
and others eventually get successful
enough to find their way to one of the big exchanges.
Five OTC-BB companies made it to the Nasdaq
exchange in December alone, including Titan
Motorcycle (TMOT) and Smart Tire Systems (SMTRF).
See StockWatch.
But most OTC-BB stocks don't even report audited
financial statements to the Securities and Exchange
Commission on a regular basis, so it's often very
difficult for investors to find even such basic
information as total sales or shares outstanding.
Determining how many shares are outstanding is
particularly important because many OTC-BB stocks
engage in highly dilutive practices, such as overseas
private placements, without investors' knowledge.
Rule change
This, however, will soon change. The SEC and the
NASD recently approved a rule that forces all OTC-BB
companies to be fully compliant with the SEC's
securities reporting requirements after a phase-in period
that ends in June 2000.
Some OTC-BB companies, such
as Hyperion Technologies and
Global Media (GLMC), have
made the problem worse by
declaring in press releases that
they trade on the "Nasdaq bulletin
board market" or by comparing
themselves to well-known Nasdaq
Internet stocks. See related story.
"Clearly, there's a lot more education to do, especially
with the number of individuals involved in the market
compared to just a few years ago," said Nasdaq
spokesman Mike Shokouhi.
Education necessary
Organizations that should be doing more to educate
investors -- such as online brokers -- are also to blame,
say observers.
Buying an OTC-BB stock on E-Trade, for instance, is a
nearly identical process to buying a Nasdaq stock.
Unlike participation in options trading, which by law
requires a certain sophistication on the part of investors,
anyone can purchase an OTC-BB stock.
"A pack of cigarettes carries a huge warning: 'This stuff
can kill your butt,' " Lichtman said, arguing that online
brokers should provide similar disclosures.
Throw in all of these factors --
plus the fact that even
'blue-chip' Internet stocks like
Yahoo! (YHOO) and eBay
(EBAY) are trading at levels
many regard as ridiculous --
and it's easy to see how
investors can get duped by
false or misleading claims or "pump and dump" scams.
Late last year, the SEC charged 44 individuals and
companies with committing fraud over the Internet for
pretending to be independent analysts when they were
really being paid to promote stocks.
Stinky stocks
"This is a a new and fast-growing phenomenon being
supported by the unusual information capabilities of the
Internet. Now scam artists can dupe a whole new, naive
generation of investors," said Lichtman, whose company
publishes Stock Detective, an online publication that
casts a wary eye on a number of popular microcap
stocks and the promoters that tout them.
The Stock Detective's most recent "stinky stock":
Millionaire.com (MLRE), a magazine publisher and
wanna-be online auctioneer that began trading on the
OTC-BB market at $4 a share and shot up to $25 by the
end of 1998 -- despite the fact that the company does not
yet have an operating Web site. See related story.
Concern about fraud is the major reason the SEC and
NASD decided to require all OTC-BB to report their
financial results.
The cost of becoming SEC-compliant will run $25,000
to $60,000, estimates Bill Ross, president of Public
Securities Inc., a market maker for about 100 OTC-BB
stocks. "That's a very significant burden" for many
microcaps, he said.
OTC-BB delistings expected
Indeed, half of the OTC-BB companies will not comply
with SEC filing requirements and will be delisted,
predicted Cromwell Coulson, chairman of the National
Quotation Bureau. NQB runs the "pink sheets," a
paper-based quotation service that competes with
Nasdaq's OTC-BB.
Many delisted OTC-BB stocks will likely move to the
pink sheets, as occurred last year when the SEC
required all foreign companies on the OTC-BB market
to be compliant. The number of American depositary
receipts trading on the OTC-BB dropped to six from
200.
But the pink-sheet alternative isn't a popular one for
some some people who work with microcap companies.
"The OTC-BB market, with all of its warts and flaws, is
a necessary capital-formation vehicle for companies
that [aren't] able to get big fast with a huge IPO," said
Brad Smith, chairman of Investors Research Institute, a
microcap advocacy group.
Smith added that the occurrence of fraud on the
OTC-BB market is actually quite minimal. "For every
one person you hear scamming everyone on the
Internet," he said, "there are a couple of hundred
legitimate entrepreneurs banging their heads against the
wall trying to find the bucks to run their business."
Yet Ralph Amato, president of BoysToys.com (GRLZ),
said the SEC compliance demand "is the smartest thing
in the world. To comply [will be] what separates
companies that are for real [from] those that are not for
real."
Amato said his firm recently completed audited
financials that will eventually be filed with the SEC.
The pink-sheets alternative
It's not quite clear that the SEC rule change alone will
have much impact on fraud, in any case. According to
Coulson, the "pink sheets" plan to start offering services
electronically in April, which could make the service
more popular and just as susceptible to fraud as the
OTC-BB.
Coulson said the microcap market is much less
dangerous now than it was in the past, when crooked
"boiler room" market makers would call unsuspecting
investors and rob them of all their money. Manipulation
is now "attempting to take place in a public
environment, and people catch on after a while," he
said.
At least one investor has learned her lesson. Vicki
Pechar, a widowed mother trying to invest for her
daughter's college education, started trading in penny
stocks about six months ago after having success in the
Nasdaq.
Pechar quickly lost a lot of money. "You start out being
very gullible, losing money, ... but then you learn to do
your own due diligence," she said.
Among Pechar's strategies for successful microcap
investing: Do plenty of research, including phoning a
company's management; invest in the stocks when
they're near all-time lows; and only put in what you can
afford to lose.
Brad Smith of the Investors Research Institute offered
some other tips for investing in OTC-BB stocks,
including:
1) Ask one of the stock's market makers for Form
15(c)211, which is the due diligence material on a
company that must be filled out before an OTC-BB
stock can be sold. The market maker must provide the
information to you but can charge for it, said Public
Securities' Ross.
2) Check out the OTC-BB rules page to make sure the
market maker presenting the OTC-BB investment
opportunity has not violated any rules. If so, report the
violation.
3) Make sure the company has filed documents with the
SEC. If it hasn't, proceed with extreme caution. If it has,
compare the company's financial results and valuation
measures to other companies in its industry. |
