WASHINGTON NEW YORK Reuters - As many as 2,000 companies will disappear from the off-exchange pink sheets, long a favorite of retail investors, when a new rule will roll out fraud in this notoriously risky enclave of U.S. equities markets next week.
The SEC rule boosts investor disclosures by requiring off-exchange issuers, often penny stock companies that do not meet the main exchange listing standards to make accurate, up-to-date financial information publicly available.
Due to a loophole in the current rules, around 2,000 of the roughly 11,000 companies listed on the OTC Markets Group Pink Market do not provide such details publicly.
OTC Markets has been trying to spread the word and encourage companies to get their paperwork in order, but it was still unclear how many would do so in time for the Sept. 28 deadline, if at all, said Daniel Zinn, the company's general counsel.
The market operator may have to remove, if only temporarily, between 1,000 and 2,000 stocks from the Pink Market, he estimated, meaning broker quotes will no longer be available to investors via online retail broker platforms.
The shakeup, which comes amid a boom in retail trading, has led some brokers including Charles Schwab TD Ameritrade and Fidelity to bar new purchases in affected stocks, causing consternation among retail investors unsure whether to bailout or stay the course in the hope that the companies comply.
While consumers still able to sell their shares after September 28, brokers have warned of severely limited liquidity which usually means an investor gets a bad deal. Investors now keen to consider companies that have not yet complied may have to call their broker for a quote.
The rule will also apply to some key corporate bond issuers, government and government lobby groups to warn this week of potential disruption to the critical funding market.
Overall, the new rule is likely to increase the cost of trading these companies, Zinn said.
We are in agreement with Zinn's goals of providing as much transparency as possible, said the SEC. Some companies, however, prefer not to provide public financial data for a number of legitimate reasons or may be unable to, he said.
Some companies may not want to incur the legal cost of providing compliant paperwork, while others may not want or need to promote trading in their stock.
In those circumstances, no quotes at all may lead to more harm than help for existing investors, said Zinn.
The SEC did not respond to a request for comment.
The Pink Market is home to an array of issuers, including reputable foreign companies looking for a gateway to the United States. However some are not-inherently risky and volatile penny-stock companies in distress, experiencing delinquency or simply shells.
The SEC has warned that the Off-Exchange Market is rife with fraud and manipulation.
Under the previous rules of the SEC, brokers had to review a company's financials before offering quotes in its stock on the Pink Market, unless another broker-dealer had already vetted them. That was the case even if the initial review happened years ago and the company had since stopped publishing financial information. The new rules of the SEC end this exemption.
Companies are on notice to provide a certain level of transparency for their investors or they can't be easily quoted. That's a good thing, said Georgetown University professor Jim Angel. What will be the problem for companies with good intentions that they can't disclose? Their shareholders are punished for actions of the companies. A new wave of amateur investors has piled in to penny stocks over the last 18 months, trading on low- or no-fee retail broker platforms and hyping up their positions through social media.
Net Q 3 K 2 z 2 on penny stock markets tracked by the Financial Industry Regulators Authority, a 130% jump compared with a year earlier but down from a peak of 1.9 trillion transactions in February.
Of the stocks affected by the new rule, the most popular among investors in trading forums like Stocktwits and WallStreetBets include the shell companies liquidating defunct retailers Blockbuster and Sears.
China's Luckin Coffee Inc., which had delisted from Nasdaq in 2012 after an accounting scandal, is among the most active on the broader Pink Market, OTC Markets data shows.
Worried by broker warnings and blaming a decline in their stock holdings on the imminent rule change, some retail investors took to social media to share their anxiety and glean gossip as to whether companies will comply in time.
Several executives from affected companies have reassured investors on Twitter that the paperwork is coming. Let's go, last day to buy, one Stocktwits user going by the handle LASPit on Aug 27 before their broker began restricting purchases in cannabis producer CannTrust Holdings Inc., mired in a regulatory battle over legal issues.
We're all in it till the bitter end now, no turning back! a user with the handle gottamakedatmoney replied.