Earlier this week, the WSJ’s popular “Heard on the Street” column fired a broadside at emerging growth companies and called into question the SEC’s efforts to enhance the benefits associated with EGC status. Unfortunately, the column did so by using a small group of foreign penny stock issuers to paint the entire EGC category of issuers as a scam factory. Check out this excerpt:

The U.S. government has tried to address the long decline in stock-exchange listings by relaxing the rules for small public companies. But this approach creates a persistent risk: more stock scams.

The quandary is on display now at the Securities and Exchange Commission. Its chairman, Paul Atkins, is pushing to further ease the reporting obligations for many smaller companies under a 2012 statute called the JOBS Act. The law gives special treatment to “emerging growth companies,” or EGCs, including exemptions from many accounting, auditing and disclosure requirements.

At the same time, Atkins is leading a fresh attack on stock frauds targeting individual investors. Since late September, the SEC has suspended trading in 12 companies’ stocks. That is more suspensions than in the previous four years combined. The SEC cited potential manipulation that appeared to be aimed at inflating the stocks’ prices and volume.

The critical link: All 12 are emerging growth companies under the JOBS Act. Though the acronym stands for “Jumpstart Our Business Startups,” these aren’t American companies. It is highly doubtful any of them could have gone public on U.S. exchanges without the JOBS Act and the regulatory relief afforded by their EGC status.

All 12 are based in Asia, including four in Hong Kong and one in China. Ten went public this year, and two last year, on the Nasdaq Stock Market. All 12 initially went public as “penny stocks,” pricing their IPOs at less than $5 per share. Yet most didn’t stay that way.

The article goes on to recount how the prices of these penny stocks soared during the relatively brief period following their IPOs until the SEC suspended trading.

The apparent manipulation of prices in a couple of handfuls of foreign penny stocks is a pretty slender reed upon which to rest a broader indictment of EGCs, and I think the case gets weaker as the column goes on.  For example, the column says that the stock market is “awash with struggling EGCs” and points to the fact that of the 304 listed companies currently trading below $1 a share 205, or 67%, self-identified as EGCs, and that 63% of that group were foreign companies, most of which came from China or Hong Kong.

I don’t think the fact that most of the companies that trade below $1 are foreign companies is a big surprise to anyone who has been paying attention over the past 15 years. Putting that issue aside though, I’d have guessed that EGCs accounted for much more than 67% of sub-dollar stocks. That’s because most IPOs significantly underperform the market and, according to WilmerHale’s 2025 IPO Report, nearly 90% of IPO issuers have been EGCs since the enactment of the JOBS Act. (It’s also worth noting that according to an article by Nasdaq’s chief economist, less than 25% of listed companies remain below $1 after 210 days.)

An SEC spokesman is quoted as saying that “it is unreasonable to conclude” that EGCs in general “are at a higher risk of violating securities laws” just because the 12 recent stock suspensions were all at EGCs. That’s right, of course, and the WSJ’s effort to use some scammy behavior on the part of a small group of foreign penny stock issuers to call into question the accommodations provided to EGCs is really a stretch.

– John Jenkins