We intend to take advantage of new regulation that could finally let us take a peek into the financials of many dark stocks that will soon be forced to report their numbers if they want to remain quoted on the OTC and provide some liquidity for investors and insiders. In order to gain the best investing advantage from the new regulation, it will be necessary to identify dark stocks that will probably want to stay compliant with the new regulation. We are currently making that list. We think this is a once in a lifetime opportunity to generate significant alpha, but the window may only last a couple months. 

We will be releasing our dark stock opportunity list very soon, so opt in here if you want to get notified once the list is ready.

On June 30, Jason Paltrowitz, Executive Vice President of Corporate Services at OTC Markets and Dan Zinn, his Chief General Counsel, answered common questions regarding the SEC 15c2-11 (211) Rule change, effective September 28, 2021, and its impact on the venue’s markets, and investors.

The short but useful explanation went into the “What” and “Why” associated with the current evolution of the requirements that broker/dealers, as well as public companies trading on the OTC Markets, must comply with in order to maintain what pretty much amounts to a “trust” factor in the eyes of prospective investors.

This of course served as the perfect backdrop to congregate with our peers at another Investors Roundtable on July 30, 2021, hosted by Bobby Kraft at the SNN Network. Maj Soueidan, co-founder of GeoInvesting, engaged in a thoughtful discussion on 211, or what many refer to as “The Dark Stock Rule“

For us at GeoInvesting, this is probably one of the most relevant things to come out of the OTC environment in recent memory, This is because of our investment strategy which partly revolves around hunting for Tier One Quality micro cap OTC stocks. 

While we are not totally opposed to regulations that could bring some transparency to dark stocks, we believe the rationale behind rule 211 is misplaced. The regulators cite that they are attempting to protect investors from fraud. 

However, it is our opinion that most of the fraud that occurs in the stock market originates from companies that actually disclose their financials that trade either on the OTC or even national exchanges.

This is because that’s how you run pump and dump scams – by “portraying legitimacy,” even though you may not be legitimate

We think our track record of outing 12 U.S. listed China based stocks and over 20 U.S. based microcap pump and dump scams gives us some authority on this subject. 

Furthermore, the rule is just going to give incentives for the companies that want to be dark, to stay dark. The reason many of them went dark was to avoid regulation, and now the regulators are giving them a free pass to screw investors who already invested in them!

I’d like to add that a lot of these companies that are dark are very quality companies. Some of them may even report financials on their websites, where you can get some idea of what’s going on. With all that being said, there is a silver lining.

We know that some companies just won’t comply for a while, but that is where our penchant for researching a dark stock comes into play. In the end, value always wins out, even for dark stocks, just maybe not on your timetable.

However, we can hang our hats on the fact that while there may be a delay in current information being offered (and on an ongoing basis), it WILL happen with many OTC companies. Again, those like us, who have the patience and resources to research and find these companies, will come out ahead since a lot of legitimate companies fall into the murky category of dark stocks.

When they do come out of the woodwork, essentially uncovering the veil that prevents most retail investors from gleaning the entire picture of who they are and what they do (financials, executive roles and reputations, investor decks), that’s where the true value of these investments can be unlocked. Basically, when the masses find out, the rest is elementary.

As an investor, being ahead of the game is a key factor to successfully riding gains from the illiquidity that most people avoid, to improvements in liquidity, a factor that many use to legitimize an investment, especially if fortified by a wealth of research supporting a bullish case.

211 In a Nutshell – Implications for The Dark Stock

Mr. Zinn explains the Rule and why the change is taking place:

“So SEC Rule [15c2-11] is the rule a broker has to comply with [by filling our Form 211] before initiating a quote in a market like ours. And the way it works now, is a broker needs to determine whether a company has made current information available before the broker can post a quote in that security. They will file a form with FINRA once FINRA approves the broker’s filing (FINRA is the broker dealer regulator that’s in charge of this), then that broker can commence a quote in our market.

What the amendments do are really two major things that change the way that traditionally works.

One is that that initial requirement for current information is now extended. So that a company needs to continuously keep information current in order to be the subject of a public quote.

And two, instead of a broker filing a form with FINRA, now we OTC markets have the authority to determine whether a company is compliant, and whether we can open the market for brokers to commence quoting.

The “Why” is really the concern about the susceptibility to fraud. So the idea behind the original proposal from the SEC was that if a retail investor has access to that kind of real-time quote information in a security where there’s not a current set of information out there – current financial statements, information about the company and its business – then that investor is going to be more susceptible to fraud to misinformation that’s put out there by bad actors.

And so by limiting the availability of that quote information, you make an investor understand that there’s something different about that security, and that they might need to do additional research. That’s really the “Why”. There are a lot of complicated steps and procedures that flow from that. But that’s the underlying goal.”

Soon, we are going to go into other subject matter on the regulatory front, namely the restrictions being put on U.S. Listed China-based IPOs by the SEC in the name of risk disclosure deficiencies. Obviously, there is a lot going on that we all need to be aware of as investors in all types of stocks that in the past have literally telegraphed red flags to unsuspecting investors, but we are on top of it!