Pinks show up on Reg Sho due to the delay in DTC reporting.
Example:
Company IHUB sells shares to an accredited investor in Texas using Regulation D, rule 504 as the exemption from registration. The shares are issued to the investor "restricted" under Regulation D and Rule 144. The investor then obtains legal opinion through Texas securities law, which allows shares sold ONLY to accredited investors, to be free trading. The opinion is then sent to the T/A, the T/A removes the legend and the shares become free trading.
Now, hows it effects REG SHO. When the investor receives the signed documents from the company concerning the purchase, the investor, through his broker dealer, shorts the shares into the market, thus providing the investor with cash. At the end of the clearing period, the DTC shows an imbalance due to the "shorted" shares. This imbalance causes the company to be listed on REG SHO. Once the investor has recieved the new certs with the legend removed, he provides the broker dealer with the certs to cover his short.
This is pretty close to what happens, the shorting is 100% legal as well. This is also similar to how convertible PIPE transactions work.
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