A Little About The Pink Sheets

Printable Version : The Pink Sheets

Pinks Sheets are a growing number of technology companies, first comes the pink slips, then it's off to the Pink Sheets. After being delisted from the Nasdaq, a company can still be traded on the Pink Sheets, a stock quotation service that handles such high-risk ventures and isn't regulated by the Securities and Exchange Commission.

"It's a bit like having to move out of your house in Beverly Hills to an industrial park 20 miles east of downtown L.A.," said Marc Beauchamp, the executive director of the North American Securities Administrators Association, one of the oldest groups devoted to investor education and protection. "It's not where you want to be, but at the same time it is not the end of the world."

And with the rash of technology companies going south, there are some surprisingly big names on the Pink Sheets. eToys, which once traded above $80 per share, is now selling for a fraction of a penny on the Pink Sheets. Other onetime highfliers now on the Pink Sheets include Lernout & Hauspie, the voice-recognition software maker; Iridium, the world's first satellite phone service; and NorthPoint Communications. The quotation service, whose origins date back to 1904, got its name from the pink paper upon which company stock prices once were printed and distributed to professional traders. Investors who wanted these stocks had to contact their brokers, who called traders to get the most up-to-date prices. The entire process was considered tedious and prone to fraud. Trading was so thin and the potential for fraud so high because of the unscrupulous traders and companies that weren't regulated by the Securities and Exchange Commission.

Industry experts say a lot has changed since late 1999, when the Pink Sheets came into the digital age with an Internet-based electronic quotation service. But one thing remains the same: Coming off the Nasdaq and landing on the Pink Sheets is still considered an unpleasant experience.

Not all in dire straits

But not all companies are forced onto the Pink Sheets by dire financial circumstances. Some companies start there, testing their legs and growing slowly before approaching the larger exchanges, according to analysts. Others are closely held by one or two investors with very few shares outstanding. Still others are foreign companies--both large and small--trading as American Depository Receipts. "It's like the Minor League for baseball," said R. Cromwell Coulson, the chairman of privately held Pink Sheets. "There are some people who go right up and play for the (New York) Yankees, and others who do a year or two in the Minors." Still, no one denies that the Pink Sheets remains a dicey place to invest. "It is a riskier area and should be known as such," Coulson said.

The same investors who jumped into the stock market with the recent explosion of online trading are likely to come face-to-face with many of their investments falling onto the Pink Sheets. "We were having a discussion internally at the firm recently about how we expect a large number of well-known companies to end up on the Pink Sheets over the next few months," said Michael Shaoul, chief operating officer at Oscar Gruss & Sons, a New York Stock Exchange member and deal broker. "I think some of the mystique of the Pink Sheets will disappear as people who have never owned a Pink Sheet stock or never, ever traded a Pink Sheet stock get exposed to them for the first time by default." According to its Web site, 4,149 securities are quoted exclusively on the Pink Sheets. "We are seeing an increasing number of Internet companies coming to the Pink Sheets from the Nasdaq, but they certainly aren't the winners," Coulson said.

What's the appeal Of Pink Sheets?

The question remains why anyone would want to invest in companies that are in bankruptcy, like eToys and Lernout & Hauspie, or others that are trading for a fraction of a penny. The prospect is attractive to speculative investors who hope a stock bought at one-sixteenth of a penny might jump higher to a penny. Others might hope that a company in bankruptcy proceedings may be forced to reward common shareholders with the sale of assets or domain names. "People know they are literally buying lottery tickets," Shaoul said. "This is not 'investing,' this is gambling. But people make money gambling sometimes." Brokers and traders involved with Pink Sheets securities said that buying and selling for these types of stocks peaked in the sell-off frenzy last March and has recently been increasing because of the turning fortunes of some technology issues.

Other companies listed on the Pink Sheets include Cyco.net, a little-known miniportal; Waste Systems International, which runs nonhazardous solid waste landfills; and Coyote Sports, a sports-equipment seller. The Pink Sheets Web site notes that the "company reportedly went bankrupt." There are also plenty of big-name companies that choose to trade on the Pink Sheets, including Deutsche Bank and Loews Cineplex Entertainment, the national movie theater chain. "We are the tier of stuff that can't, won't, or doesn't want to be listed on the exchange," Coulson said.

There are 18,000 or more publicly-traded corporations in the United States. About 2,500 of the largest and most established firms trade on national stock exchanges, including 1,600 that are listed on the New York Stock Exchange (NYSE). Another 4,600 firms are listed on the NASDAQ system, which is home to most of the major firms in the over-the-counter (OTC) market. More than 2,800 NASDAQ securities are listed on the NASDAQ/National Market System, which imposes the highest standards on OTC stocks. Outside of regional exchanges, the balance of publicly-held firms are traded in the murky netherworld of U.S. equity transactions known as the "non-NASDAQ OTC" market. Almost all of these securities - more than 11,000 - are quoted in a daily circular known as the "pink sheets," so named for the color of the paper on which they are printed.

Not all pink sheets securities are penny stocks, but virtually all penny stocks are found in the pink sheets.  The pink sheets are home to almost all penny stocks, which, with very few exceptions, are not traded on the exchanges or NASDAQ. Unlike exchange-listed stocks and those on NASDAQ, pink sheet securities are subject to no meaningful listing requirements and escape almost all of the computer-guided surveillance and policing of the other segments of the equities market. For this reason, the pink sheets also are the primary playing field of penny stock swindlers, who thrive in the obscurity of the lowest rung on the ladder of the U.S. securities market. Some non-U.S. companies whose financial statement do not conform to American accounting standards and formats also appear in the pink sheets.

Why would companies choose to be listed in the pink sheets? Most have no choice; they are unable to satisfy the minimum listing standards for the NASDAQ market. Some of the securities are those of dormant or bankrupt companies - "shells" that are made to order vehicles for manipulative secondary market trading.

Some pink sheets stocks are those of low-profile, closely-held firms, a number of which trade at $50 a share or even in multiples of hundreds of dollars. A number of small and medium sized financial institutions of primarily or entirely local and regional interest have their market in the pink sheets.

While a number of even the low-priced securities are perfectly legitimate, it is apparent that the pink sheets are increasingly being overrun by abusive promoters of manipulated penny stocks. Even in unmanipulated pink sheet securities, the absence of meaningful information for decision-making purposes poses a serious hazard. An investor's risk of losing all or some of his or her funds in penny stocks is all but assured when the considerable handicap of manipulation is combined with the almost total "black out" on information in the pink sheets.

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