From a board on SI http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=18488329 Win-Lose-Draw, do i understand this correctly? JAG and its ilk want to essentially require regualar shareholders to hold certs while maintaining the company's own ability to pump massive quantities of electronic shares through the DTC clearing system?
I don't think that's quite correct. I believe that the small companies want ALL trading in their stock to be performed via certificates, through their transfer agent (or their own executives, were they to be self-transfer). The aim is obvious. Without book entry of shares, it would be virtually impossible to short a stock where certificates were required to trade in that stock. The theory is that no investor holding the stock long would lend their physical certificate to some trader who intended to short the stock via the selling of the borrowed physical certificate, even if there were proper "paperwork" backing the loan transaction (for legal purposes). And a "short-against-the-box" strategy also becomes impossible. Since most of these small companies are not optionable, a speculation wager against the stock price via options is also impossible.
Of course, the fallacy of the proposal (which is in essence to eliminate shorting of the equity, either through options or a direct short) is that an important factor in the check-and-balance system of efficient market pricing would be removed, and in theory, the unshortable stock could rise and rise and rise again on nothing more than wanton speculation, presuming that no one sells into an ever rising stock price. No one, that is, except for those chosen few people who can always acquire additional stock at below-market prices.
There is nothing to prevent corporate insiders from issuing new certificates that benefit their own interests (or related-party interests), to be sold (with an appropriate certificate, of course) into the hyper-inflated market price.
Retail investors might also find themselves facing yet another obstacle. If and when the investor decides to cash out, s/he cannot simply call their broker and sell. The certificate(s) must first be brought to the broker, administrative paperwork performed, and then sold. In a fast moving market, the delay could be extremely costly. And in a fast moving market, the spreads are likely to widen enormously, presuming that somewhere, there exists a market maker willing to make a market in a stock that requires physical certificates before trades can be accomplished. And then there's the not-so-small matter of the three day settlement period, which I won't go into here...
A great scheme, if I do say so myself... An investor would have to be a complete and utter fool to be speculating (long) in any company that would shield its stock in this manner. But, as the old saying goes, there's another fool born every minute... (Or would it be more correct to say that a fool and his money are soon parted... <LOL>)
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