Taking Penny Stocks out of the Boiler Room
New service aims to make 'pink sheet' issues a bit less risky
The only time most investors hear about the "pink sheets" is when one of the penny stocks trading there is touted in a spam E-mail or the Securities and Exchange Commission snares another crook.
But R. Cromwell Coulson hopes to change that. He's already had some success. Ten years after he and a group of investors took over an aging stock listing publisher called the National Quotation Bureau, Coulson has turned the company—renamed Pink Sheets LLC after the color of the paper that was historically used—into the main electronic listing and quotation system for over-the-counter securities in America.
The Pink Sheets, of which some version has been around since 1904, exist as a sort of corporate United Nations, but without the clout or most of the "first world" membership. It is the last stop before circling the drain for many distressed companies, the first hop into legitimacy for many tiny start-ups, and the home to a slew of companies that either can't or won't list on a true exchange. In short, it is the good, the bad, and the ugly.
The trick now is for Coulson to show investors that there might be a few gems worth ferreting out of what is still—and often correctly—viewed as a perilous swamp. "Most people think 'pink sheets,' and they think crappy penny stocks," admits Coulson. "The value comes in separating out the companies that are worthy of investor consideration."
Taking a page from London's popular AIM stock market, Coulson in March created a new tier, called OTCQX, for Pink Sheets-traded companies that agree to file credible disclosures and appoint outside overseers—approved by Pink Sheets—to review them. Of the more than 8,000 companies listed on the Pink Sheets, only 11 have met the requirements and paid the fees to join the OTCQX ranks so far. But Coulson projects that more than 100 will do so by year-end.
Disclosure. In another move, all other Pink Sheet-listed companies are being shoehorned into new categories based on their level of disclosure to investors and the SEC. Companies that offer no disclosure will have a stop sign icon next to their symbols, while those believed to be sending out spam or engaging in other questionable promotions will have a skull and crossbones displayed next to theirs. It is a "buyer-beware flag," says Coulson.
Andrew Berger, who edits Walker's Manual of Unlisted Stocks and related publications, doesn't think Coulson's new rating system will keep investors safe from penny-stock scams. He says any investor who needs warning flags should probably not be investing in Pink Sheets-listed companies.
But some give Coulson high marks. "Coulson's done a great job of bringing the Pink Sheets into the modern era," says James Angel, a finance professor at Georgetown's business school. In the past, Angel notes, anyone wanting to trade a stock listed on the Pink Sheets would have to get a broker to find the best price from the few market makers who dealt in that security. By putting broker-deal quotes online, he says, Coulson has made the market "much more transparent and much more efficient."
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