Oct. 08, 2018
Subject: Retail Investor Fraud Hearing File No. 265-31 From: Jim Rivest Dear Mr. Redfearn, The following comments are in response to one of the draconian solutions proposed by you in combatting the fraudulent and manipulative schemes targeting retail investors. https://www.bloomberg.com/news/articles/2018-10-01/sec-spots-a-way-to-starve-the-most-suspicious-penny-stocks "The Securities and Exchange Commission is considering whether to forbid market makers from providing price quotes to retail investors for OTC companies that haven’t released financial reports for an extended period of time, according to Brett Redfearn, who runs the regulator’s division of trading and markets. No quotes effectively means no trading. “If a company is a dark company and listed in the OTC market and hasn’t put out financials for six months, maybe it shouldn’t be quoted or offered to retail investors.” Is the SEC seriously considering eliminating trading in such stocks or just kicking around ideas and floating a trial balloon? If serious in implementing such a misguided program, the SEC would be throwing out the baby with the bathwater. I understand the SEC is trying to protect investors, but it is overkill by not allowing trading in such securities. Among the OTC scammers and penny stock promoters are very legitimate 'dark' companies who provide financial information only once a year. So such a broad approach would very badly hurt the shareholders in such companies. Among investors who fish in this dark pond are some of the best market-beating long term performances. I think examples of investors who own and traffic in buying bargain OTC dark stocks makes that case. Larry Goldstein's Santa Monica letter stated the following: "For original partners, compounding has had a tremendous effect. An investment of $100,000 when the partnership launched on February 2, 1982 is now worth over $5 million if no additional contributions or withdrawals were made. A long runway and strong performance has caused exponential results. Happily, many of you have been with us for the entire ride." Goldstein has done 12%+ annually over 36 years (16%+ gross), compounding capital at over 50x for his original investors. My guess is investors wouldn't recognize the vast majority of his OTC holdings. I know of other investors who specifically focus in this 'dark' space because that's where the bargains are located and they all have done very well over a period of decades. In my case, I've been seriously investing for 20 years and among my largest positions are dark companies that provide little information to shareholders. I've sent letters about my largest position, Vulcan, to the SEC because I believe they are flouting a well established SEC rule in not filing a 13F. The SEC never responded to any of my letters or any other Vulcan investor who wrote about this issue. Ironically, I believe Vulcan's management would like nothing better for their stock to stop trading because they do not provide easy access to their financial information, as they make their shareholders sign an NDA. The SEC would actually be abetting the desire of some companies to 'hide the ball' by eliminating trading is such securities, not to mention stranding the many investors who own such 'dark' OTC securities. Historically, I don't believe there is any better risk/reward than finding and owning the hidden gems hiding in this space, but that obviously would not be true if this SEC rule stopped them from trading. Earlier this year, the SEC had a roundtable discussion that addressed the market structure for thinly-traded exchange-listed securities. The roundtable discussed the challenges faced by participants in the market for thinly-traded exchange-listed securities and potential improvements that might be considered to the market structure for these securities. Everyone on the panel acknowledged that small cap and microcap companies, which are often thinly traded, play an essential role in our economy. The SEC was interested in the views from a broad range of market participants in order to optimize the market structure for thinly-traded securities. It was an all-day affair, with 3 panel roundtables and some of the heaviest hitters on Wall Street weighing in on how to better provide more liquidity in the small cap exchange-listed space. The transcript of that liquidity roundtable discussion was 237 pages long, so there was no shortage of ideas. It was acknowledged that currently there is far less institutional stock-picking in the small cap arena because institutional investors care far more about a small caps' lack of liquidity. Money managers stated the quality of the companies took a back seat to how much the stock trades. So everything was on the table to make microcap exchange-listed stocks more tradeable, as everybody agreed that was the goal. It's ironic that OTC stocks are not given the same consideration. In fact, it's the exact opposite if they don't provide financial information over a 6-month period, these stocks may then become untradeable if this SEC proposal becomes law. The foundational tenant of the SEC mission is to protect investors, including investors in dark OTC small caps. Many microcap companies had little choice and ceased filing with the SEC because it was just too expensive to remain public with no offsetting benefits. Retail shareholders often remain in these dark companies, but institutions usually hit the sell button. These companies often become 'trade-by-appointment' securities over time as most large investors lose interest. These companies often have small floats with large insider ownership, and that illiquidity often creates real bargains. There is a better way to addressing this problem without creating a host of unintended consequences. Instead of stopping all trading because of no financial info, how about requiring the posting of a company's audited annual report. This could be done annually on their website, or a portal, or sent to shareholders who request it. We need more transparency not less! Sincerely, Jim Rivest