January 27, 2017

OTC: DERA White Paper Says It’s a Mess

The SEC’s DERA Division recently published a White Paper examining the over-the-counter market.  It doesn’t pull any punches. Here’s an excerpt from the conclusion:

These studies provide evidence that OTC stocks are predominantly illiquid, generate negative and volatile returns, are frequently targeted by alleged market manipulation schemes, and rarely transition to an exchange. These relationships worsen as OTC Markets’ self-established eligibility requirements pertaining to disclosure are reduced.

I’ve worked with several companies that either started on the OTC market or ended up there. Nothing the SEC says in its report is news to me or anyone else who’s worked with one of them.  The deck is stacked against these companies – most of them have all of the costs associated with public company status, and none of the benefits in terms of liquidity or access to capital. Most of the time, they’re waging a desperate struggle to stay afloat.  Many of these companies are forced to turn to a motley assortment of lenders of last resort & various other bottom feeders to meet their capital needs.

Remember Jack Lemon in Save The Tiger?  There are a lot of folks like that out there in microcap land.

The precarious position most OTC companies find themselves in leaves their investors with the short end of the stick too – & to make matters worse, there are a lot of sharks in these waters. It isn’t too hard to manipulate a stock that has no institutional ownership, no analyst coverage, and – at the lowest ends of the food chain – minimal disclosure.

The SEC has brought dozens of penny stock enforcement proceedings in recent years & has issued three investor bulletins in recent months about the risks of the microcap market.  Despite that, its White Paper concludes that “the size of the OTC market is large and has grown by dollar volume in recent periods, especially in the tier with the weakest disclosure-related eligibility requirements.”

Can the news about OTC stocks get any worse?  Yeah, it can.  Here’s the last sentence of the White Paper:

Demographic patterns reveal that OTC investor outcomes are especially negative for investors living in areas with greater proportions of older, retired, low-income, low-wealth, and low-education individuals.

Delaware: Chancery Court Invalidates Fee-Shifting Bylaw

In response to the Delaware Chancery Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund, the Delaware legislature amended Section 109(b) to prohibit fee-shifting bylaws for “internal corporate claims” – those alleging breaches of fiduciary duty or as to which the DGCL gives the Chancery Court jurisdiction.

In Solak v. Sarowitz, the Chancery Court recently applied this statute to invalidate a fee-shifting provision attached to a forum selection bylaw. This K&L Gates memo reviews the decision. Here’s an excerpt summarizing the Court’s holding:

To the extent it was unclear following the 2015 DGCL Amendments, the Court of Chancery’s decision in Solak confirms to practitioners that any fee-shifting bylaw (or charter provision) adopted by a stock corporation and relating to internal corporate claims is invalid.  Indeed, in its decision, the Court discussed at length the motivations behind the 2015 DGCL Amendments, including the Corporation Law Council of the Delaware State Bar Association’s desire to limit fee-shifting following the Delaware Supreme Court’s decision in ATP Tour, Inc.

IPOs: 2016 at a Glance

Because I have the attention span of a guy who basically surfs the Internet for a living, I’ve started to develop a real fondness for infographics.  Here’s a good one from MoFo highlighting the year in IPOs.

John Jenkins