Relive the Good Old Days of Unregulated Stocks

The early 1920s must have been an exciting time to be an investor. So many companies promising so many wonderful things. We’ve all heard the stories about how easy it was for companies to sell stocks. That made getting into the “next great thing” easier than ever before…even if it also gave scammers some pretty easy targets.

The Securities and Exchange Commission put a stop to almost all of the freewheeling-and-dealing. Laws made companies more accountable. The stock markets became more rigid. Futures, options and derivatives all became strictly monitored and standardized.

The trend has continued. Even Over-the-Counter Bulletin Board stocks have some basic listing requirements today.

Now, don’t get me wrong. I know that before the SEC, a lot of people got suckered into losing bets. And I understand the feeling that “something had to be done” to protect people not smart enough to know where they put their money.

But sometimes, I wonder what it would it be like to go back to the days before stocks were overregulated.

Maybe that’s what draws me to Pink Sheet stocks.

Pink Sheets are truly the “Wild West” of investing — one of the last bastions of laissez-faire capitalism. It’s not an exchange…just a listing of stock quotes. And the only thing a company needs to get listed on the Pink Sheets is a single market maker quoting its stock price.

That’s it. No reporting requirements…no audited results. Any company that can snag a market maker can list its shares on the Pink Sheets.

As you might imagine, that gives scam artists plenty of leeway. Without anyone to check up on them, companies can be created out of thin air.

The problem is the frauds aren’t always easy to spot. These guys are pros — putting out press releases that are indistinguishable from ones from legitimate companies. You’ll see the tantalizing buzzwords, like “earnings,” “profits” and “growth.”

Up till now, the only way to tell if a Pink Sheet stock was worth your attention — not to mention your money — was to actually talk to the people in charge. You’d need to ask questions, ask to see financial reports, sometimes even visit the company yourself.

That’s exactly the kind of work I do each month in Bulletin Board Elite. But if you don’t have time for that kind of legwork, there is a shortcut to finding legitimate Pink Sheet stocks.

It’s called the OTCQX, a premium listing service that’s been around only since March of this year.

Essentially, OTCQX certifies that companies trading over the counter or on the Pink Sheets are legitimate businesses. To get certified, the company must meet certain requirements. A company is certified in one of three different categories.

The most basic tier is called PrimeQX. The rules to qualify are quite simple. First, the company must be a true business — no shells or idle hands here. It must also post quarterly and annual financial reports. And it must be in decent financial health. Companies in bankruptcy or undergoing reorganizations won’t make the cut.

As you can tell, those requirements weed out most of the scam artists right away. It’s tough for a fake company to put out quarterly reports.

For a bit more safety, however, OTCQX has PremierQX stocks. These are securities that trade for a minimum of $1 and meet all of the requirements to be listed on a national stock exchange. Like the lower-tier stocks, they must also produce quarterly and annual reports. But PremierQX stocks also must hold annual shareholder meetings.

(OTCQX also has a tier for international stocks. These companies must meet the requirements of their foreign exchange and make their reports available in English.)

That makes OTCQX a great place to start looking if you’ve never invested in these types of companies before. Of course, since it’s been around only since March, there aren’t a lot of stocks listed yet. In fact, as I type, only four stocks have made it to the PremierQX list, with 11 more on the International list. But more stocks are being added to the list every week as they meet the requirements.

Now, keep in mind that just because a company is listed on the OTCQX doesn’t mean it’s a sure bet. For one thing, stocks are only required to post financial statements with OTCQX. That means it can still skirt some of the SEC’s reporting requirements. Of course, considering major firms like Enron figured out how to get around federal scrutiny for a while, that’s not necessarily a bad thing here.

But even if a business is legitimate, it doesn’t mean it’s going to succeed. Even with OTCQX’s seal of approval, you still need to examine the business plan and the company’s numbers. If the company doesn’t have a chance to grow, there’s no reason to risk your money on it.

Again, I do all this work in Bulletin Board Elite. I know all the angles for exploring a company, from the numbers that matter to people who know the most. And until more companies sign up with OTCQX, that’s the only way you’ll see consistent profits from Pink Sheet stocks.



July 30, 2007

The Daily Reckoning