US ‘pink leaves’ undergoing overhaul as securities regulator seeks to stamp out fraud

WASHINGTON / NEW YORK, Sept. 23 (Reuters) – As many as 2,000 companies could disappear from the over-the-counter “pink leaves” long favored by retail investors when a new rule to stamp out fraud in this notoriously risky enclave of The US stock markets will go into effect next week.

The Securities and Exchange Commission (SEC) rule strengthens investor disclosures by requiring over-the-counter issuers, often penny-listed companies that do not meet major stock exchange listing standards, to make information publicly available accurate and up-to-date financial statements.

Due to a loophole in the current rules, approximately 2,000 of the approximately 11,000 companies listed on the Pink Market operated by New York-based OTC Markets Group (OTCM.PK) do not publicly provide this information.

OTC Markets has tried to spread the word and encourage companies to tidy their documents, but it was still unclear how many would do so in time for the September 28 deadline, if any, said Daniel Zinn, General Counsel of the Company. .

The market operator may have to withdraw, if only temporarily, between 1,000 and 2,000 shares from the pink market, he estimated, meaning that brokerage quotes will no longer be available to investors via online retail brokerage platforms.

The reshuffle, which comes amid a retail boom, has led some brokers, including Charles Schwab / TD Ameritrade (SCHW.N) and Fidelity, to ban further purchases in the affected stocks, causing consternation among retail investors who are unsure whether to bail out or stay. the course in the hope that companies will comply.

While clients will still be able to sell their shares after September 28, brokers have warned of very limited liquidity, which usually means investors get a bad deal. Investors still keen to get into businesses that have not complied may need to call their broker for a quote.

The rule will also apply to some issuers of government and corporate bonds, with major industry lobby groups warning this week of a potential disruption to this critical funding market.

Overall, the new rule is likely to increase the cost of trading for those companies, Zinn said.

“We agree with the SEC’s goals of providing as much disclosure as possible,” Zinn said. Some companies, however, prefer not to provide public financial data for a number of legitimate reasons, or may not, he continued.

For example, some companies may be unwilling to bear the legal costs of providing compliant documents, while others may not want to promote trading in their shares.

“Under these circumstances, no listing can do more harm than help existing investors,” Zinn said.

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. But some are very risky and volatile penny stock companies in distress, delinquency, or just shells.

The SEC has warned that the over-the-counter market, more broadly, is teeming with fraud and manipulation.

Under previous SEC rules, brokers were required to review a company’s financial data before providing quotes for its shares on the Pink Market, unless another broker had already verified them. This was the case even though the initial review took place years ago and the company has since ceased to release financial information. The new SEC rule ends this exemption.

“Companies are urged to provide some level of transparency to their investors or they cannot be easily listed. That’s a good thing,” said Jim Angel, professor at Georgetown University. “The problem is, what about companies that choose not to disclose? Their shareholders are being punished for the actions of the companies.”


A new wave of amateur investors have gathered in penny stocks over the past 18 months, trading on low and no-fee retail brokerage platforms and increasing their positions on social media.

In August, there were 601.1 billion transactions on the stock markets tracked by the Financial Sector Regulatory Authority, a jump of 130% from the previous year, but down from the peak of 1 900 billion transactions in February.

Among the stocks affected by the new rule, the most popular among investors in trading forums like Stocktwits and WallStreetBets include shell companies liquidating defunct retailers Blockbuster (BLIAQ.PK) and Sears (SHLDQ.PK).

Chinese firm Luckin Coffee Inc, which was delisted last year from the Nasdaq following an accounting scandal, is among the most actively traded in the broader pink market, according to data from OTC Markets.

Worried about brokers’ warnings and blaming their declining equity holdings on the impending rule change, some retail investors have taken to social media to share their anxiety and glean gossip about whether companies will comply with the rule. time.

Executives from several affected companies reassured investors on Twitter that the paperwork was arriving. For some thrill seekers, these promises are another buying opportunity.

“Let’s go, last day to buy,” wrote a Stocktwits user passing through the LASPit handle on August 27 before his broker began restricting purchases from cannabis producer CannTrust Holdings Inc (CNTTQ.PK), who is mired in a legal battle over regulatory issues.

“We’re all in it to the bitter end now, no turning back!” … Please show me the money at the end! A user with the gottamakedatmoney handle replied.

Reporting by Michelle Price in Washington and John McCrank in New York Editing by Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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