UVSE 'Rule 144 -why ????
Tuesday, August 28, 2007
The Boiler Room
One of the sadder aspects of my job is dealing with people who have lost considerable sums (sometimes hundreds of thousands of pounds) often representing their life savings following boiler room scams. In case you aren't aware of this scam, a plausible sounding young man cold-calls you saying he got your name from a marketing list, such as a share register or professional body, and suggests that you invest in a company with stellar prospects. He will demand you make a decision immediately "as they are Floating/About to take off/about to be taken over". It sounds good, so you think "all investing's a bit of a gamble, what the hell"
You then receive a share certificate. If you're lucky it has the name of a registrar in (usually) Nevada and the legend "Rule 144K restricted Stock". This can be sold after one year (if you're lucky) and but more likely after two years, probably at a fraction of what you paid for them - the broker will have taken a massive spread and probably dealt as principle. The buyer will not usually be able to check the price and will therefore be taken for a ride. If you're unlucky, there will be no such legend. The shares are worthless, the "broker" you dealt with will disappear, pocketing your money and you have no comeback.
Rule 144k, intended to protect investors in the US in fact makes it very difficult for small and medium companies to access the US capital markets, and this hurts the US economy - who wants to invest in shares you might not be able to sell for 2 years? How are these companies to grow? US investors are over zealously protected by the SEC, which is why companies use the services of brokers outside the USA, often nominally based in Switzerland, to raise money. These firms will target punters outside their home jurisdiction - the UK and Europe in order to bypass all laws relating to financial advice.
In the case of rule 144k stock you've invested in companies that actually exist, some even have businesses which turn a profit. But the restriction means you cannot sell the shares. This gives the unscrupulous boiler rooms more ways to prise money out of people. They'll tell you that they've found a buyer, but he will only deal in a minimum size, and you must buy more to qualify generating more commission and spread. They will say that there's a take-over, and the purchasing company will pay over the odds for stock, but only if you put up a bond or buy more stock. Neither of these excuses will fool a financial professional, but people are scared into going for it by hard sell. They are embarrassed at being taken and they are clutching at straws. Their life savings are at stake.
In short, if the company you're talking to ain't registered with the FSA (check here), don't do business with them. Ever. It's a scam.
Much as I'm a libertarian loon, I'm not an anarchist. Financial services rely on trust and that requires regulation. The FSA is excellent, policing with a light touch, would that all law were so, allowing risk to those that want it but giving protection against malpractice by regulated firms to less experienced clients. Companies have sometimes abused this, but they've abused the ludicrously complex and onerous US GAAP in the past too.
This is why the city is booming, and why we're crushing the over-regulated US capital markets for new issues. Rule 144k is a case in point of what happens when markets over-regulate. Contrast rule 144k with the success of AIM. Sure there's an awful lot of shit on AIM and some total disasters. But there's some great little companies too. It's all about a healthy attitude to risk. Some want it, some don't. The role of the financial professional is to give people the right amount of risk. The Americans have tried to make hard rules which clever people bypass. The UK and the IFRS is principle based, which is much more satisfactory.
There's no need to do business outside the regulatory framework in the UK, and that is because the rules are sensible and policed with tact. This is under threat from MiFID. The EU doesn't like the city, makes the UK too independent, you see. It also acts as a home for "Locusts", as the Germans call hedge-funds and Private equity houses. That however, is a subject for another post.
Posted by Jackart at 8/28/2007 09:29:00 AM
Labels: Business, Economics
