SEC proposal to halt the trading of Dark stocks

The SEC is currently proposing a   rule  which would essentially stop all trading of 'non-reporting' companies on the OTC markets. This would be achieved by prohibiting brokers/dealers from providing quotations/offerings for these 'dark' stocks. The SEC has proposed this rule in the hopes of combating fraud and protecting retail investors.

The problem with this proposal is that it is unlikely to achieve the desired consequence of eliminating fraud. It will also likely have many unintended consequences.

The frauds on the OTC tend to be current in their reporting, they want to promote their stocks and fleece shareholders by selling them worthless shares. Going dark and making your stock more illiquid isn't a very good way to get gullible investors to buy your shares.

A common reason that firms go dark is simply to save money, filing and registration costs can run in excess of $1 Million per year.  A tiny company with a handful of employees can't afford those kinds of costs. 

Other firms may wish to remain in the dark to protect their business interests or trade secrets,   maybe they are majority owned by a founding family and don't see the need to waste money filing.  The list of reasons goes on.

Admittedly, sometimes management may want to remain in the shadows so they can pay themselves egregious salaries  or find other ways to live the good life at the expense of minority shareholders.

My answer to this is Caveat Emptor!

If the SEC goes through with this rule thousands of small investors, including myself, will see the value of our holdings in 'dark' companies seriously, and possibly permanently, impaired.

These aren't frauds, pump n' dumps or Chinese RTO's I'm talking about either.

There are a multitude of legitimate companies which have legally de-registered with the SEC. Many of which have been around for decades, provide financials to shareholders and pay regular dividends.   These include;

Hershey Creamery Co. (HRCR)
Pinelawn Cemetery (PLWN)
Beaver Coal Co (BVERS)
Northfield Precision Instrument Corp (NFPC)
Goodheart Wilcox Co. (GWOX)
Sonics and Materials Inc (SIMA)

I could list hundreds of such companies, all of which are real businesses that communicate with shareholders (Some more frequently than others) and provide financial statements.

A better approach for the SEC would be to;

a) Insist that all OTC companies provide annual  financial statements, either on the OTC website or on their own website.

b) Amend the 'shareholders of record' rule so that management can't use it to go dark and cut out minority shareholders

c) Provide a lower cost alternative for small company's to file  with the SEC  and OTC markets

I would urge all dark stock investors to contact the SEC if you have concerns over the proposed rule. You can go here to leave a comment.

If you wish to read comments posted by other investors you can find them here

My comment can be viewed here 


Thanks for reading,


David

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Subject: File No. S7-14-19

From: David J Flood                                                                                                                                                                                                                       October 8, 2019

Dear Sir/Madam,

I am writing to urge you to reconsider your proposed rule (S7-14-19) to block quotes for companies traded on the OTC markets which are not deemed as current in their information.
Whilst I appreciate and support the endeavors of the SEC to protect retail investors, increase transparency and fight fraud I do not believe the proposed rule with have the intended consequences and may in fact produce many unintended consequences.

A large number of retail investors, including myself, hold fractional ownership in 'dark' companies and the proposed rule would destroy the value of our investments. The majority of my capital is invested in 'dark' companies and my net worth would be virtually wiped out should this rule be enacted.

In short, should this rule be enacted it would be nothing short of catastrophic for me and the financial future of my family.

There are a multitude of legitimate companies trading on the OTC markets which are classed as 'dark'

PLWN, a well respected cemetery corporation which provides annual financial information to the New York department.

BVERS and CNWS, both of which are limited partnerships which have existed for decades, pay regular dividends, and provide limited partners with in-depth financial and corporate information on an annual basis.

NFPC which was founded in 1952 and provides shareholders with annual financial information.

HRCR (Hershey Creamery Co.), the famous American Chocolate and candy manufacturer which is a wonderful example of the American success story.

Many small companies have chosen to go 'dark' due to the high costs associated with the required filing etc, in some cases these costs can be in excess of $1 Million which is a large cost for a small company with a handful of employees.

The SEC provides these companies with a legitimate path to saving costs by filing a form 12g, this allows them to lower costs and ensure they can continue as a going concern whilst continuing to communicate with shareholders via the OTC markets website or their own company website.

Whilst researching companies which trade on the OTC markets I have found several hundred companies deemed as 'not current' which are, in my opinion, legitimate businesses with a strong commitment to transparency and shareholder communication.

Many of them are family owned firms and thus, their own interests are closely aligned with those of retail investors who own fractional ownership in their companies.

If I may, I would like to propose some potential alternative options for achieving what both the SEC and retail investors would like to see, a safer and more transparent trading environment where fraud and unnecessary opacity is discouraged.

a) Amend the terms of your 'shareholders of record' so that companies cannot exploit it to go 'dark' and then cease communicating with shareholders. At present only registered shareholders are deemed of record and those who own shares in street name are not counted individually.

Thus companies can claim they have fewer than 300 shareholders when in fact they may have many thousands.

b) Provide a lower cost alternative for those small companies which cannot afford the costs of full registration and filing. A lower cost option would encourage many firms to increase shareholder/investor communication and would in turn generate more revenue and earnings for brokers and market makers.

c) Allocate more funds toward educating retail investors about the risk of fraud and encourage them to contact the SEC to report any documented existences of fraud or suspicions of probable fraudulent activity.

I hope you will bear in mind all of the retail investors and small legitimate businesses who will be negatively impacted should rule S7-14-19 be passed and reconsider passing the current proposals in favor of an alternative approach which is conducive to both the SEC, retail investors and those legitimate companies which are classed as 'dark'.

Regards,

Mr. David J. Flood