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Market Education Centre
This section is designed to assist Investors and Issuers in aspects of prudent market conduct and avoid pitfalls reviewing investment opportunities of companies who conduct negotiated restricted unquoted trade in their securities. |
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The following article, is an editorial of extracts that helps explain how OTC markets function, although the market in itself is inert to participants, the caution should be exercised when receiving information from third party persons acting for listed companies. companies primarily list in a capital market for only 2 reasons;
Thus this WARNING, if you did not get information directly from the company, then it may contain errors, if you did not get professional advice, you may have mis-interpreted the information. Watch what consultants or advisers say or provide, they may be incorrect. Generally companies freely give information about themselves and their core business, thus always get the latest information direct. Be sure your adviser, consultant is licensed and an accredited with a legal market otherwise you could loose your investment and money. Get an INDEPENDENT lawyers advice. Certain critical items that Investors should be able to obtain or review within a few days from a company or Advisor;
If your company DOES NOT or comply with the above, then you should conduct further investigation. If the company you are conducting due diligence cannot provide adequate information, it could be classed as a 'dark company' since not all aspects are transparent and open to the light of scrutiny. AU-OTC Contracts and Markets
A pure Over-the-Counter Market is a financial market where products are traded over-the-counter, usually in certificated form on a direct basis, however the advent of electronic medium and changes in legislation has created this form of trade to a 'legal status' as opposed to a physical one. In Australia a deregulated Over-the-Counter Market exists as the Australian OTC Bulletin Board where the Issuer conducts direct negotiations and reports the result to the market. The essential ingredient to viable
capital markets is trust, honesty, prudence, a clearing mechanism for
the completed sale of commonly traded securities which
permits counterparties transactions to mutually agree to transfer and
legal exchange of securities/cash.
Clearing has many variable forms, such as delayed, semi-secured to full
irrevocable settlement, usually on Australian OTC Bulletin Board a
delayed settlement is employed to ensure all parties are satisfied with
the result and the transaction then becomes irrevocable upon the expiry
of the 10th day.
Drafting of OTC derivatives (not usually issued by SMEs) OTC derivatives are documented under Master Agreements. A Master Agreement is a document agreed between two parties that sets out standard terms that apply to all the transactions entered into between those parties. Each time that a transaction is entered into, the terms of the Master Agreement do not need to be renegotiated and apply automatically. Market Makers & OTC Traded Stocks
In the Australia., over-the-counter trading in securities (shares) is carried out via exempt market makers who use a reporting quotation services such as the Australian OTC Bulletin Board (AU-OTCBB) with the delivery of Yellow Slips, Blue Slips or Pink Slips which forms the reporting process to the Market for issuance of new certificated securities. Good Market Makers do not shepherd investors from companies and should be fully accountable, open, forthright, have a high degree of honesty with no shadowy dealings. Company activity on the AU-OTCBB is monitored by a Review Board and Market Regulator who then recommends corrective action, or reporting to the Australian Securities & Investment Commission, or in the case of foreign companies to their domestic home market Securities regulators. In the event of serious cases the Review Committee may report to the Policing Authorities, in matters that are non public threat cases the Market may form a Judicial Committee to resolve matters for recommendation to a Court, if warranted. The US over-the-counter market is monitored by the NASD. Because such trades are not traded on any major stock exchange and there is less research done on them in the financial market, they are considered to be risky. As there is very infrequent trading in such a market, the spread (which is the difference between the bid price and ask price) is large. The USA OTC Market is huge as these statistics show. (Data derived from USA third party sources);
Total Listings 8,594 It is interesting to note the statistics of 130 companies quoted exclusively, compared to those quoted on Pink Sheets, initial reading would indicate the 130 companies probably have higher 'investment worthiness'. Hence the increasing reason why emerging companies are seeking to list on less congested boutique markets such as the Australian OTC Bulletin Board, being a corporate strategy of 'being seen' rather 'just a number' in a barrel of 8,000 other companies. The Australian OTC Bulletin Board is a boutique market for serious players with quality corporate investment offerings which are usually pitched at an opening price of $1.00 per share. Although the Australian OTC Buletin Board is smaller, companies attain a higher profile and presence without the congestion of a larger Exchange. Anti Fraud, Anti Money Laundering
elimination program
One of the unique attributes of the Australian OTC Bulletin Board is its business modus operandi that renders the market very hard to penetrate for fraudulent or outright misrepresentations or unscrupulous activities. Investors can rely on the principle of 'what-you-see-is-what-you-get' since the large part of equities trading on the AU-OTCBB is by DEAL-DIRECT, essentially the Australian OTC Market has an unblemished history and generally free of suspect traders duping naive investors. Any form of lying, cheating, mis-representation, outright dishonesty is acted on quickly and such events are reversed or delisted and reported, in extreme cases the company may be Black-listed together with its directors and banned from entry. Investors should speak and Deal-Direct with the company, then they get information first hand without any consultant or broker involvement to confuse the final judgement of the Investor. Other Markets of the Australian Unlisted Capital Market operations The Australian OTC Bulletin Board operates (or has the plans to configure) a number of similar markets primarily for SMEs, such as; Official List is the entry point for all companies regardless of size or compliance requirements. QUOT-EX is an international deregulated capital market for foreign companies, which incudes the divisions of;
AU-OTCBB being the current Australian market, denominated in AUD Lo-CAP market for start up companies or companies that have a very low level of disclosure, usually only Annual General Meeting and Annual Fiscal report. These companies are in the Start Up to $5mil bracket. PRIME SME Market is for companies with a longer history of management and financial stability (2 years) with more regular reporting and higher level of documentation, these companies are usually in the $5mil to $50 mil NTA bracket. Disclosure requirements. The Australian Unlisted Capital Market expects that any and all companies entering a capital market should have the executive skill sets to prepare and file a basic Offering Document that becomes the contractual representations of the Issuer to the Securities Buyer, which is reduced to an Application Form or an OTC Transfer Form. If a company cannot provide an OTC Offer & Disclosure Document then it is questionable that it should be listed and classed as raw investment quality or a dark company. |
In Australia
and many other countries SMEs rarely ever trade in excess of $5.00 per share
thus the phrase penny stock in Australia usually means a company that habitually has
a stock price under $0.10c
Stock prices regularly between $0.10 to $0.50 cent range could indicate a company with better assets and management ability, depending on volume, and frequency. Stock prices upwards of $0.50 - $1.00 range would be a guide to a potential good emerging company, depending on volume, and frequency. Investment quality usually comes at a price, good companies seek higher share prices because they worked hard to build assets and dividends to shareholders, thus looking after their shareholders. In the U.S., penny stocks are common stocks that trade for less than $5 a share. More generally, the term refers to stocks that have a low per share price, especially low priced stocks that might be easily manipulated. In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an "over the counter" listing service, such as the US-OTCBB or Pink Sheets. The terms penny stocks, micro cap stocks, small caps, and nano caps are also all sometimes used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service. Europe as a whole does not have an deregulated or regulated OTC system due to fragmented Country and securities legislation, there have been many attempts to set up an European OTC Markets or similar OTC type market, but difficulties seem to stymie the success of these enterprises. Lack of Broker, Dealer, Consultant loyalty may be a cause since its hard to trade SME securities which are almost totally illiquid, hence inability to trade means no commissions thus few licensed securities dealer will handle the stock. Europe does not in any Country have the legislation exemptions for a unlisted or deregulated capital market outside a Stock Exchange, furthermore, there are stiff restrictions and cost, taxes on 'unquoted' securities making them illiquid, nor fluid or portable which are what investors demand. Some consultants operate a matching consultancy or act only as mentor to emerging companies as a Find-a-Investors service. In the UK markets, penny stocks, or penny shares as they are more commonly called, generally refer to stocks and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%... In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority (FSA) In France, penny stocks generally refer to risky stocks with a price of less than 1 euro. Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter. The Securities and Exchange Commission warns that, "Penny stocks may trade infrequently", which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment." High-Risk Investments
Since a penny stock has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock can lead to a lot of volatility in the stock price. This lack of liquidity can send a stock price soaring up quickly or crashing down quickly. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation by management, market makers, or third parties. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stocks extremely difficult to sell. Secondly, unlike NASDAQ or the NYSE, there are only minimal listing requirements for a stock to remain on the US-OTCBB, namely that they make their filings with the SEC on time. In fact, companies that fail to meet minimum standards on one of the broader exchanges and are delisted often re-list on the US-OTCBB or the Pink Sheets. Furthermore, stocks trading on the Pink Sheets (recognizable with a .PK suffix) have little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders. The SEC notes the same about Internet message boards, where fraudsters claiming to be unbiased investors who have carefully done their due diligence may in fact be company insiders, and that a single person or a small team can create the appearance of a huge interest in a stock simply by creating a huge number of aliases, while banning the most vocal or perceptive critics of these offerings. Penny Stock Fraud
"A company's website may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst. Unwitting investors then purchase the stock in droves, creating high demand and pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it is easier to manipulate a stock when there's little or no information available about the company." There are all sorts of variations of the classic pump and dump, from short-and-distort to selling chop stocks — the last being a scam in which shares are acquired for pennies under Regulation S and then illegally sold to overseas or domestic retail investors. Other features of the typical penny stock scam include spam e-mails and junk faxes that tout ludicrous and fraudulent claims, crooked newsletter writers who promote a stock for a fee, message boards swarming with "buy now!!!" postings about a stock from anonymous, paid posters, fake or misleading press releases issued by the company, or boiler rooms full of cold-callers targeting naive, elderly, or foreign buyers all in attempt to drive up the share price while the insiders sell. Crime gangs; small & large A more recent outbreak of penny stock fraud is far more brazen, and is based mostly overseas. Organized crime gangs in Eastern Europe and Asia will acquire a large number of shares of a moribund penny stock. Then, using passwords and logins to electronic brokerages, such as E*Trade, stolen at public computer terminals in hotels and elsewhere, they will then use the hijacked customer accounts to buy up shares, while at the same time selling their own shares, draining the customer accounts and leaving their victims holding thousands of shares of worthless penny stocks. While not all stocks listed on the Pink Sheets or the US-OTCBB are fraudulent, one Business Week article estimated that chop stocks alone "make up perhaps half the 85 million-share daily volume of the OTC Bulletin Board." Another one to watch the Fake Company selling real shares yet never starts a business, or does not have a real business connection with a proper core business. Or the real company selling real shares but never starts a business and has 100s of excuses why things went wrong. Internet Spam Many Internet users have been exposed to e-mail spam promoting penny stocks. Approximately fifty-five billion unsolicited e-mail messages are sent each day, a significant proportion of which tout penny stocks, usually as part of a pump and dump scheme. According to a study conducted at Oxford, 15% of all spam was related to penny stock fraud. According to the study, "People who respond to the "pump and dump" scams can lose up to 80% of their investment in two days. Conversely, the spammers who buy low-priced stock before sending the e-mails, typically see a return of between 4.9% and 6% when they sell." The pretend or Fake Capital Market/s or Fake Broker Another recent scam in the last few years has seen the emergence of unlicensed business consultants setting up fake capital markets or internet Stock Exchanges to skim fees out of unsuspecting companies. Some of these types of scams are similar to other internet spoof businesses with smooth talkers in flash suites and big promises of investments and capital which drags on over months and years but never eventuates. We have all heard of the Nigerian Scams and Lottery cons which look real but are fakes. These people usually operate from homes or serviced offices and move around from one location to the other frequently, have good industry knowledge and talk like a dealer or broker. They also generally like to tell (boast) of their contacts, qualifications, history and flash stories of success and how well they are connected which is all shadow boxing. They often hide behind other legitimate professionals such as Accountants, Solicitors, Banks and the like, even setting up front companies locally or offshore in remote countries with foreign bank accounts. Often they are unregistered, unincorporated and unlicensed. Gone in 60 seconds. Lastly, although most SMEs are genuine and there are legal markets for SMEs, Companies and Investors need to watch the "Gone on 60 seconds" money transfer. Once paid you will never see it again. Others study articles
External links
Additional References for study and research
For advanced study see Wikipedea, Australian Securities & Investment Commission, Securities Exchange Commission USA.
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Australian Unlisted Capital Market
European Unlisted Capital Market