From stop signs to black diamonds: Rule 211 and the impact on retail
Sept 29, 2021
Amendments to "Rule 211" went into effect yesterday, and it is teaching many small cap investors about market structure. It is also teaching the people who are implementing the rules a thing or two about social media.
The SEC adopted new rules that translate to this: OTC-listed companies (around 10,000) must provide continuous and updated disclosure. This sounds obvious, as the vast majority of companies already do this through quarterly reports and press releases, but there are those that didn't file financial reports. Some for many years.
The new rules mean companies can no longer attract hard-earned retail capital without keeping up with their filings. The days of skating along on rules written decades ago are over.
It's only been a day since the new rules went into effect and the notion that companies could scam investors almost seems quaint: do you mean to say there was a time when companies could say whatever they wanted to run up its shares only to dilute shareholders and enrich themselves? It happened a lot more than most of you would imagine.
The biggest change that is giving many retail investors serious heartburn is the elimination of what is known as "Stop Sign" stocks.
For the most part, stop sign stocks are companies that failed to file financials. Some didn't file for 9 or 10 years.
But the stop signs are gone now. Poof! Vanished. Now all stop sign stocks have been moved to what is known as the "expert market."
So what, you say? Who cares, you may be asking. Well, there's this:
Let's say you invested in a stock that went from one tenth of a penny to 8 cents. This is a 7900% gain. Typical for the OTC. Now let's say along the way you learned all about this stock, how it traded, what to expect from it...so you love it even though it has been a stop sign since the day you plunked your $1,000 into it. Which is now $80,000. You love this stock! But the new rules have moved your stock to this expert market. This is a market you or anyone else around you knows anything about.
They said it would happen. But you had no idea your stop sign along with your $80,000 is sitting in a black box. You can't see the bid or ask any more. Welcome to the expert market.
There's a lot of capital that has just moved into this expert market, which is represented cleverly as two black diamonds. Scary!
And it is scaring a lot of retail investors. Many on social media are expressing their hope and prayers that the companies they have believed in for so long will be able to get "pink current."
This pink designation gives them a pass to escape the expert market and become an official, functioning member of the capital markets. Pink is the get out of jail free card and it ain't cheap.
George Sharp, one of the OTC's better known CEOs, recently tweeted that he spent $300,000 of his own money to "bring back" three of the companies he rescued. His companies haven't been brought back yet; his along with hundreds of others are sitting in this new and unfamiliar market along with all of the capital and trust that is tied up in them.
Unintended consequences
It's great that regulators want to protect investors. Everybody supports that. The problem is that the people who run the market don't appear to be super duper prepared to implement the rule. There have been surprises. Bad surprises.
First, many of the trading platforms (E-Trade, TD, Schwab, etc.) prevented investors from buying stocks that were stop signs a full month ahead of the rule. Without notice. This did not go down well. Not well at all.
With so many companies now sitting in the expert market, social media is full of stories of how "backed up" the OTC is. They can't process the filings. As a result, scores of investors are losing sleep because a stop sign has changed to a black diamond. And does this mean their stock will be de-listed? No one is saying anything about this. The people you would expect to say something, aren't. And it's causing a lot of fear.
In a year we will be able to look back on all of this and chalk it up to growing pains. Or maybe it's shrinking pains since there will be fewer companies.
In the meantime, with so many stocks (2,000) moved into this expert realm of purgatory what you are seeing is the sort of writhing and thrashing that you expect in a horror movie. It is really quite sad.
Social media and cult stocks
The thing is, many public companies that use social media to engage with investors grow large fan bases. I would even go so far as to say that some stop sign stocks have cult-like followings. I have written about this before.
And you don't have to be a weed company to gain cult-like status. There are mining companies. Blockchain companies. Cryptocurrency companies. Auto companies (Tesla). It's not that these companies are fundamentally better, it's just that they care about their social media audience. So they become hugely successful.
This success is a result of social media's ability to attach people (retail investors) to management teams and stories. People end up believing in the company's strategy. They talk about it at dinner. They form a special bond with some of their portfolio items. Oh, you can't sell that until such and such happens...
And to take all of that away is very painful for a lot of people.
But there is a cure. As with so many things that are stock-related, the cure amounts to information.
If the people in charge of implementing these rule changes would only respond to questions and cries for answers on social media, it would keep the panic to manageable levels.
This is something that should have been strongly considered along with the new rules.
Source:
https://www.linkedin.com/pulse/from-stop-sign...teve-yanor
URL is a better read.
Sept 29, 2021
Amendments to "Rule 211" went into effect yesterday, and it is teaching many small cap investors about market structure. It is also teaching the people who are implementing the rules a thing or two about social media.
The SEC adopted new rules that translate to this: OTC-listed companies (around 10,000) must provide continuous and updated disclosure. This sounds obvious, as the vast majority of companies already do this through quarterly reports and press releases, but there are those that didn't file financial reports. Some for many years.
The new rules mean companies can no longer attract hard-earned retail capital without keeping up with their filings. The days of skating along on rules written decades ago are over.
It's only been a day since the new rules went into effect and the notion that companies could scam investors almost seems quaint: do you mean to say there was a time when companies could say whatever they wanted to run up its shares only to dilute shareholders and enrich themselves? It happened a lot more than most of you would imagine.
The biggest change that is giving many retail investors serious heartburn is the elimination of what is known as "Stop Sign" stocks.
For the most part, stop sign stocks are companies that failed to file financials. Some didn't file for 9 or 10 years.
But the stop signs are gone now. Poof! Vanished. Now all stop sign stocks have been moved to what is known as the "expert market."
So what, you say? Who cares, you may be asking. Well, there's this:
Let's say you invested in a stock that went from one tenth of a penny to 8 cents. This is a 7900% gain. Typical for the OTC. Now let's say along the way you learned all about this stock, how it traded, what to expect from it...so you love it even though it has been a stop sign since the day you plunked your $1,000 into it. Which is now $80,000. You love this stock! But the new rules have moved your stock to this expert market. This is a market you or anyone else around you knows anything about.
They said it would happen. But you had no idea your stop sign along with your $80,000 is sitting in a black box. You can't see the bid or ask any more. Welcome to the expert market.
There's a lot of capital that has just moved into this expert market, which is represented cleverly as two black diamonds. Scary!
And it is scaring a lot of retail investors. Many on social media are expressing their hope and prayers that the companies they have believed in for so long will be able to get "pink current."
This pink designation gives them a pass to escape the expert market and become an official, functioning member of the capital markets. Pink is the get out of jail free card and it ain't cheap.
George Sharp, one of the OTC's better known CEOs, recently tweeted that he spent $300,000 of his own money to "bring back" three of the companies he rescued. His companies haven't been brought back yet; his along with hundreds of others are sitting in this new and unfamiliar market along with all of the capital and trust that is tied up in them.
Unintended consequences
It's great that regulators want to protect investors. Everybody supports that. The problem is that the people who run the market don't appear to be super duper prepared to implement the rule. There have been surprises. Bad surprises.
First, many of the trading platforms (E-Trade, TD, Schwab, etc.) prevented investors from buying stocks that were stop signs a full month ahead of the rule. Without notice. This did not go down well. Not well at all.
With so many companies now sitting in the expert market, social media is full of stories of how "backed up" the OTC is. They can't process the filings. As a result, scores of investors are losing sleep because a stop sign has changed to a black diamond. And does this mean their stock will be de-listed? No one is saying anything about this. The people you would expect to say something, aren't. And it's causing a lot of fear.
In a year we will be able to look back on all of this and chalk it up to growing pains. Or maybe it's shrinking pains since there will be fewer companies.
In the meantime, with so many stocks (2,000) moved into this expert realm of purgatory what you are seeing is the sort of writhing and thrashing that you expect in a horror movie. It is really quite sad.
Social media and cult stocks
The thing is, many public companies that use social media to engage with investors grow large fan bases. I would even go so far as to say that some stop sign stocks have cult-like followings. I have written about this before.
And you don't have to be a weed company to gain cult-like status. There are mining companies. Blockchain companies. Cryptocurrency companies. Auto companies (Tesla). It's not that these companies are fundamentally better, it's just that they care about their social media audience. So they become hugely successful.
This success is a result of social media's ability to attach people (retail investors) to management teams and stories. People end up believing in the company's strategy. They talk about it at dinner. They form a special bond with some of their portfolio items. Oh, you can't sell that until such and such happens...
And to take all of that away is very painful for a lot of people.
But there is a cure. As with so many things that are stock-related, the cure amounts to information.
If the people in charge of implementing these rule changes would only respond to questions and cries for answers on social media, it would keep the panic to manageable levels.
This is something that should have been strongly considered along with the new rules.
Source:
https://www.linkedin.com/pulse/from-stop-sign...teve-yanor
URL is a better read.
