Frankfurt Stock Exchange IPOs

 

Since 2010, companies cannot get DTC eligibility without approximately $100,000 per year in revenues. This is a guideline, and not a steadfast rule, but it has become very difficult to obtain DTC eligibility for companies that do not come close to this, and would not be worth taking a chance. In addition, the cost has risen from virtually free, to approximately $7,500 if you can find someone to do it.

 

DTC stands for Depository Trust & Clearing Corporation. Stocks held by DTC are kept in the name of its partnership nominee (Cede & Co.).  Not all securities are eligible to be settled through DTC ("DTC-eligible"). First a little history: DTC eligibility used to be almost automatic after a company cleared its registration statement and its 15c2-11.  One of the company shareholders would deposit their shares with their broker, who would apply for DTC-eligibility through a clearing firm affiliated with DTC.  Once done, the stock could then be bought and sold electronically through brokers or online.  Recently, this ‘automatic’ DTC eligibility approval by DTC is no longer occurring for many smaller companies going public.  Some are having trouble even finding a broker or clearing firm even willing to submit the DTC-eligibility application. The cause of the change is easy to pinpoint, but as usual, the reaction by DTC, clearing firms, and brokerages is not so easy to understand. In Jan 2009, FINRA issued a notice to its broker-dealer members reminding the of their responsibility to insure federal securities laws and FINRA rules are complied with when they are participating in the sales of unregistered securities.  Since these brokerage firms were charged with investigating the stock issuances of issuers to make certain there were no unregistered distributions, smaller companies were immediately hit the hardest, because they have the shortest operating histories and are more likely to trigger red flags with FINRA. The end result is that it has left many companies, and even attorneys, at a loss as to how to become DTC-eligible. The problem is that many shareholders of these non-eligible companies cannot deposit or trade their shares. Obviously, this is a huge problem. In addition, name changes, stock splits or other things that cause companies to obtain a new CUSIP would also cause the company to be required to re-apply for DTC eligibility. In a nutshell, a company needs to be 'real' and not a 'shell' in order to become DTC eligible.

 

 

The Frankfurt Stock Exchange does not have this issue at all.

 

 

Two separate studies, one conducted by a group of executives and academics, and another by McKinsey and Co. for New York Mayor Michael Bloomberg and New York Senator Charles Schumer, both reached the same conclusion; excessive regulation has made the U.S. stock exchanges a less-than-favorable place to go public, and singles out the Sarbanes-Oxley Act, as the main reason.

 

So what is the Sarbanes-Oxley Act, and why is it making such a negative impact on U.S. public companies? Sarbanes-Oxley was enacted in 2002 in response to the failures of several large companies like Enron and WorldCom. It’s intent was to protect investors. Basically, the act requires full disclosure on just about everything and most believe that the requirements went way overboard. It comes down to expense. To adhere to the requirements of Sarbanes-Oxley is extremely costly. So costly, that, since passage of the Sarbanes-Oxley Act, many U.S. companies have found the ongoing expense to be reason enough not to be listed on the OTCBB or Pink Sheets (or any other US Stock Exchange)

 

 

Some critics blame short sales as a major cause of market downturns, such as the crash in 1987 and 2008. In fact, two years after the 1987 crash, the U.S. government held a House subcommittee hearing on short selling. They wanted to examine the effects short sellers had on small companies and the need for regulation after allegations of widespread manipulation by short sellers of over-the-counter stocks. SEC officials reassured the public that manipulations hadn't been uncovered and more rules would be put in place. Short selling is still a wide-spread problem for OTCBB and Pink Sheet and even Nasdaq listed stocks today. And these days short sellers in the U.S. leave almost no stock unturned. This is why you see so many stocks trading in the sub-pennies on the OTCBB and Pink Sheets, which at one time were a much, much higher price.

 

Short selling has an even darker side because of a percentage of short sellers who are not above using unethical tactics to make a profit. Sometimes referred to as the "short and distort," this occurs when short sellers manipulate stock prices, usually in the OTCBB and Pink Sheet by taking short positions (where they sell the stock without actually owning it) and then using a smear campaign on chat rooms to drive down the target stocks, where they then buy the stock at a big price differential from where they sold it short. [This is the mirror version of the pump and dump, where crooks buy stock (take a long position) and issue false information that causes the target stock's price to increase]. Short selling abuses like this have grown along with internet trading and the growing trend of small investors and online trading. Short selling is a tremendous problem on the OTCBB and the Pink Sheets, and one that doesn't seem to have a good solution.

 

 

Many people that we speak with are under the illusion that once a company goes public, they can raise money by selling the company's stock to the public. This is absolutely false. In fact, once you are public, you cannot offer to more than 35 non-accredited investors and you can only solicit to people that you have a pre-existing relationship with. Moreover, not only can you not advertise the offering, but you cannot even put an offering document on your website. The fact is, the same exact private offering restrictions apply when you are a public company or a private company. There is no difference. The only way to offer stock 'publicly' like most people think they can do, is to become approved for a public offering with an underwriter. And as you probably already know, conventional IPOs are out of favor, and simply will not happen unless the company is extremely established and typically must have revenues of a minimum of $50MM per year. And even then, it is next to impossible to find an underwriter willing to underwrite a conventional offering.