Hey NOBO,
Have you heard about this? Could explain a lot. Sorry about the long read, but I think this could be important.
Securus News: Penson Crack Down on Stock Prices Accepted Cause Companies Upheaval
Penson Implements a $.10 Rule for
Stock Clearing; Evaporates Public
Company Stock Movements and Sales
By Craig A. Huffman, Esquire,
Managing Partner,
Securus Law Group, P.A.
Craig@Securuslawgroup.com
The Ten Cent Problem
Companies whose stock trades below $.10 per
share may quickly find themselves in an illiquid
position, unable to raise capital, for
shareholders to sell shares, or in any way
deposit shares through many brokerages.
Penson Financial Services, Inc. (PSFI) made a
significant policy change that public companies
should be, or may already be aware of in
regards to the pricing of securities for deposit
through their clearing system. PSFI is the third
largest clearing firm in the United States
(Pershing and Fidelity are #1 and #2
respectively). PSFI’s clearing actions of stocks
being deposited to brokerages has a significant
effect on penny stock companies. Their actions
just became devastating to micro priced
stocks. On June 1, 2011, Penson released a
new policy whereby they will be restricting
deposits of shares of any kind, whether they
are made by physical certificate, DWAC, DRS
(Direct Registration System) or ACAT. Penson
will no longer accept deposits of equity
securities traded on the Pink Sheet or OTC
Bulletin Board markets priced below $0.10.
The amount of companies affected could be
staggering. This also affects a great deal of the
284 brokerage firms that clear through Penson,
but not all since some will be able to clear
depending upon status of accounts with
Penson. Penson reasoned that somehow
stocks at these low prices were more suspect
to fraudulent activity than higher priced stocks.
Penson related their reasoning as:
“Also, the regulatory community has recently
become more focused on the deposits of
physical certificates, particularly those that
trade on the Pink Sheets or OTC Bulletin
Board. The securities industry has experienced
a significant spike in fraudulent transactions
related to reduced valuations or non-existent or
fraudulent transfer agent services for sub-
penny securities. In addition, the potential for
the use of these types of securities for money
laundering or investor fraud are also of serious
concern. As a result, the regulators have
increased their scrutiny of transactions in these
types of securities.”
Interestingly, Penson does not name any of the
supposed “Regulators” who have these
concerns. None the less, Companies below, or
even near this price point now find themselves
at ultimate risk. Having a public trading market
that many of their shareholders can not utilize.
They can not sell or even deposit their
legitimate shares of companies they invested
in. While they can try to “broker shop” the
solution very well is at the Company level.
The Dreaded R Word Solution
While no one wants to contemplate being
forced into a reverse division of their
outstanding shares, the actions of the market,
and in this case the actions of a clearing firm,
can force this solution on a company. Reverse
divisions (splits) should be done when there
are strategic reasons to do so. The actions like
Penson took as to stock prices just made that
decision a lot easier for companies to make.
Expansion of your business operation on a
national level is a good reason. There are
others reasons and movements of some of
your subsidiary businesses or new business
relations that I am sure exist, would be
adequate and solid reasons to declare a
reverse.
A stock reverse is a function of state law. In
some states (Delaware for instance) it takes a
shareholder approval which could necessitate
an expensive and untimely shareholder
meeting. For these companies control of the
share voting power is therefore essential.
While in other States it is a matter of board
resolution (Florida, Nevada). Articles of
incorporation or bylaws also have to allow for
reverse divisions. There are numerous matters
that have to be completed during this process.
The process should take 30 to 45 days on the
outside to complete all matters. The most
important factors are a law firm who works
through the list of to dos and a clearing agent
with a good relationship and responsiveness.
FINRA is responsible for the action of the
shares being reflected on the market to show
the reverse. They are also in charge of
approval of all of the paperwork which they
issue for this, and for the giving of a new stock
symbol as applicable. Working closely with
FINRA is essential by the transfer agent and to
make sure that all documents going to them
are correctly done, and supplied in a timely
fashion.
The numerous items that have to be completed
include: 1) getting a new Cusip for the new
post-reverse shares 2) having the transfer
agent involved to do the transfer agent
notification form, and other documents to
FINRA, 3) having a cover letter completed with
a complete corporations history 4) having the
transfer agent make sure there are sufficient
stock available, 5) supplying FINRA with the
issuer form, along with notarized copies of the
corporations standing documents from the
State, notarized articles of incorporation from
the State, notarized resolution by the board of
directors for the reverse, and notarized
shareholder approval document if required.
The matter must be announced by a press
release and/or an 8-k, which would be positive
in message stating why the strategic reason
was made for the reverse. In this instance, it is
to allow shareholders to trade the stock. And
just how many stocks really should be below
$.10 per share anyway. The timing for
completion should be within 30 days. Under
FINRA rules you have to give them at least ten
days notice before execution. The execution
date will actually be dictated by FINRA when
they choose to effect it. Usually they only give
one day’s notice, usually at about 2-3:00 EST
that the reverse will be effective the next day at
the start of trading, so you should have a
canned press release ready to issue at a
moment’s notice the afternoon you get the
word on the effective date for the next day’s
trading.
Securus attorneys have completed
many reverses for companies and
may be able to help yours.
