We Won’t Go! We Are Survivors!

The United States of America has been built on the backs of our entrepreneurs. That is our basic tenet. If you try hard enough, you can achieve anything. It doesn’t matter what social level you come from, the color of your skin, the religion you practice, your age or your gender. You let nothing stop you. And, you think outside of the box.

When the stock market concept got started here in the 1700’s, it originally consisted of those investments that would help the war movement against the British. Government debt was traded at the corner of Wall and Broad Streets. After the war, both equity and the government bonds were trading in the same location and it began to get a bit crowded along that path in front of Trinity cathedral. In 1790, Alexander Hamilton, as the first Secretary of the Treasury, began promoting actual stock exchanges to strengthen our economy and continue to rebuild from the war effort. In 1817, the New York Stock Exchange Board was then created and they moved into their current location at 40 Wall Street where they are today. However, some stocks were not considered quite worthy enough and were not allowed to trade within the New York Stock Exchange so they traded outside on the curb. The curb traders were our early entrepreneurs and this type of business grew until the New York Curb Exchange became an official exchange and later changed its name to the American Exchange.

Later, as the country grew, a new wave of trading began, created by more entrepreneurs. This trading did not take place on any actual exchange where there were strict rules regarding trading and company governance. This trading did not have to be in one location at all but was able to be done, initially, over the counter at the cage window at different brokerage firms. Later, with the advent of the telephone (and later the computer), this type of trading just exploded. This trading was called over-the-counter, or OTC. OTC trading occurred in the trading departments within brokerage firms that had been involved with initial public offerings of new securities and held a certain amount of inventory of shares within the firm after the issue was made effective and actually trading. These departments’ employees were the market makers of the brokerage firms. They sold their shares to their own investors who had accounts at the brokerage but they also sold their shares to other brokerage firms, whoever they could reach on the phone. The terminology for other brokerages was “other houses on the street”. These market makers made and lost money on the spread and the volume.

The shares traded in this manner, were still offered via a prospectus and either a certain amount of registration or under an exemption from registration. They followed legal guidelines – not as strict as the NYSE or AMEX, but still within boundaries. They carried more risk than the blue chip stocks on the exchanges but there was a limit to the risk. Eventually these OTC stocks fell under the authority of the National Association of Security Dealers and their quotation service, NASDAQ. NASDAQ is now a listed exchange.

Entrepreneurs love to think of new ideas. So, how about selling stocks that were both very risky AND, because of the risk, could also bring a higher rate of return on an investor’s money? What about the smallest companies? They usually had the most creative business ideas but always needed capital. Could they publicly trade to raise that capital? Why not? Therefore, the PinkSheet stocks were created. They were first only listed on printed packets of skinny 14” long paper that were pink in color, hence the name, PinkSheets. The name of the company was listed, the brokerage firms that were offering a market were listed, along with the different bid and ask prices and volumes traded on any particular day. Additional price and corporate action history was listed in a Standard & Poor’s book of stocks. (The Bulletin Board was another quotation service similar to the PinkSheets but there was usually a higher requirement for posting current information to this service than the PinkSheets.) But, unless you contacted the company directly, it was not easy to acquire much additional information for either of these trading venues. Yet these stocks flourished.

Unfortunately, these stocks, being the most risky for investors were also the bane of the authorities. In the past several years, while this level of securities investment offered the most in financial returns they also offered the most opportunity for fraud, money laundering and financing questionable or shell ventures while offering the least in investor protections. The most egregious opportunists within the PinkSheet community cost brokerage firms and their investors millions in losses that lined the pockets of the opportunists only. But the losses incurred here, due to the extremely low prices of the stocks trading here, are no comparison to the losses that can and have occurred on the exchanges where the stock prices are generally much higher.

Now we have the current economy of 2010. It’s an unstable market, in general, reflecting a lack of confidence in the authorities and their ability to protect investors. The majority of losses in this market, however, have occurred due to gaps in oversight on the exchange level securities, not the PinkSheets or Bulletin Board stocks.

As the authorities attempt to curtail the fraudulent activities they have focused on the weakest side of the market, the small cap companies who trade on PinkSheets and Bulletin Board. The small cap companies cannot fight back as successfully as the largest firms on the listed exchanges who have caused the most losses overall.

Currently the U.S. Securities & Exchange Commission has allowed the Financial Industry Regulatory Authority (FINRA, previously NASD) to support their brokerages in not accepting certificate deposits or trading in low-volume, low-priced non-listed stocks (PinkSheets and Bulletin Board). At the same time, the SEC has allowed the Depository Trust & Clearing Corporation, (the ONLY depository in the U.S.) to deny these same small cap companies the ability to trade their shares electronically.

If a small cap company cannot deposit certificates or trade by using stock certificates because they are denied by one authority and they also cannot trade their shares electronically because they have been denied by the other authority, and the one ultimate authority, tasked by Congress to maintain markets and protect investors, the SEC, is not doing their job what will happen to these little entrepreneurs, most of which still have the most creative business ideas, cumulatively hire the most employees nationwide, and, as small businesses, provide the most stable portion of the national economy? Just like the Curb traders of the 1700s and 1800s and the Over-the-Counter traders of the 1900s, the PinkSheet and Bulletin Board Traders will adapt and survive. It is our nature.

We Are American!

Written by Salli A. Marinov