By David Dittman
Personal Finance
You can find several varieties of Enron, the remains of WorldCom and what's left of Global Crossing. But you may have also imbibed their beer (Heineken), tasted their chocolate (Nestle) or kept time by their products (Bulova).
It's where scammers, goons and hucksters ply their trades; it's where legitimate operators choose to market their shares.
The over-the-counter (OTC) market is home to companies high, low and in-between - an under-regulated swap meet for distressed companies and questionable penny stocks. But it's also home to hundreds of financially sound companies and is the American market of choice for many Canadian-based companies that don't want to be subjected to the regulatory morass and considerable expense a Nasdaq or New York Stock Exchange listing entails.
These guys - real companies with real revenues run by real people - have fully exposed themselves according to the requirements of the Toronto Stock Exchange (TSX) and Canadian regulatory bodies.
The most prominent ventures for OTC stock are the Pink Sheets (www.pinksheets.com), a privately owned and operated listing and information service, and the Nasdaq-run OTC Bulletin Board (OTCBB, www.otcbb.com).
The origins of the Pink Sheets go back to 1904, when the National Quotation Bureau began as a paper-based, interdelaer quotation service linking competing market makers in OTC securities across the country. The publication was printed on long, narrow sheets of pink paper; hence, the name. Since that time, the Pink Sheets and the Yellow Sheets have been the central resource for trading information in OTC stocks and bonds.
The OTC Bulletin Board began operation in June 1990. It's a regulated quotation service that displays real-time quotes, last-sale prices and volume statistics for OTC equity securities. An OTC equity security generally is any equity that isn't listed or traded on the Nasdaq or a national securities exchange. OTCBB securities include national, regional and foreign equity issues, warrants, units, American Depositary Receipts (ADRs), and Direct Participation Programs (DPPs).
But because the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) exert little power over the OTC markets, the Pink Sheets and the Bulletin Board. That attracts crooks and quick-buck scammers. While the boondoggles here are nowhere near the magnitude of those on the NYSE or the Nasdaq - see WorldCom or Enron, for example, - they are more numerous.
So the reputation as something of a Wild West-style, anything goes output is well earned. Pink Sheet-listed issuers aren't required to register securities with the SEC or be current in their reporting requirements to be quoted on the Pink Sheets. Nor are issuers required to file financial or other company information with the Pink Sheets.
OTCBB companies don't have any filing or reporting requirements with the Nasdaq Stock Market or the NASD. However, issuers of all securities quoted on the OTCBB are subject to periodic filing requirements with the SEC or other regulatory authority.
Into this financial reporting gray area swoop the hucksters and crooks. And often Pink Sheet-listed companies are tainted because of others' sins. A sort of "you run with dogs, you bark like them" attitude prevails.
But remember the in between. There's the quality company working its way toward an NYSE or Nasdaq listing or a thinly traded firm - owned primarily by family or employees - that wants to avoid the trouble of being a public company. There are many new regulatory, auditing and board requirements imposed by the Sarbanes-Oxley Act that add tens of thousands of dollars to the cost of being a public company, and CEOs must personally guarantee a company's financial statements.
There are legitimate companies that, for a variety of reasons, opt not to list with the NYSE or the Nasdaq. And there are also the American Depository Receipts (ADRs), instruments used to trade shares of foreign companies that choose not to list their stocks on US exchanges.
The Swiss chocolate maker Nestle trades on the pink sheets via ADRs. PF Growth Portfolio picks ARC Energy, TransForce and Vermilion and Income Portfolio pick Yellow Pages Income Fund are Canadian companies with readily available financial information.
Transparency is assured because these companies - unlike the many domestic companies that aren't required to report financial information for their Pink Sheets or OTCBB information - must satisfy Canadian regulators. Detailed financial information for each of the PF Portfolio companies can be accessed via the TSX Web site www.tsx.com
Yahoo Finance (http://finance.yahoo.com) also provides full TSX and OTC quote information. Perform a symbol lookup using the company name and all relevant information is readily available.
It's possible to purchase shares in these companies via OTC market. As detailed in the August 25, 2004, issue, this is a relatively simple process. But you can go this route or deal with a broker who's able to trade directly on the TSX. While your transaction costs will be greater if you choose to execute your order north of the border, you avail yourself of more quote certainty and greater liquidity. You'll pay a little more in fees, but you'll get better executions.
The critical fact is that there are legitimate companies that for a variety of sound reasons choose not to list their shares on the widely known (and costly to the company) exchanges. Certainly there are the pump-and-dumps, dummy companies and frauds; but there are many, many gems.
Fear not the over-the counter market. The Canadian companies trading here are fully transparent due to Canadian and TSX reporting requirements.
Editor's Note: David Dittman is deputy managing editor of Personal Finance, 1750 Old Meadow Rd., Ste. 301, McLean, VA 22102, 1 year, 24 issues, $97, www.pfnewsletter.com.s
