October 9, 2019
Hi, I think the idea behind this new rule starts with the correct premise, all shareholders should have access to the financial reports of the companies they invest in. As someone with over 10 years of experience investing in dark companies I think it is ridiculous that I need to sign an NDA to see the financial statements of a company that I am a part owner of. While the idea is good, I think the proposed execution is backwards. In my opinion (and experience), a company chooses to go dark for a few reasons. The best reason is that the company wants to reduce operating costs. For a small company, reporting costs can be a substantial drag on the business. My suggestion would be to look for ways to lower this costs for smaller companies, I like other investors would be fine with yearly financial statements. However, there are many bad reasons that a company may choose to go dark. Management or the board, which is often a large holder of shares in such companies, can view going dark as a future opportunity to take the company private at a much lower valuation. In these circumstances, management purposefully denies shareholders financial information. Shareholders become disenfranchised after years of no information and give up. This leads to a depressed share price, which then gives insiders the opportunity to offer a lowball takeout price that has a much higher probability of being accepted. In other instances, management likes being dark as they can conceal the level of compensation they may be receiving, which may be egregious. Finally, a company may choose to be dark to hide mistakes and avoid having to face the consequences. The companies that choose to go dark for bad reasons are the ones that investors need to be protected from, and I agree that posting financial information would be the best way to protect investors (sunlight being the best disinfectant). However, as proposed the onus of getting financials would fall on the brokers, this seems wrong. The onus should fall on management, the board, and the company, to provide investors the information they have the legal right to have. If the rule went ahead as proposed the share price of these companies, which is arguably too low already by intention, would tank. This would be exactly what the management teams would want! Now they can really take advantage of shareholders by paying themselves whatever they liked, with no hope of any oversight, or they could look to take the company private at an egregiously low price. Many shareholders would be forced to accept this low offer as they can't afford to go through the expensive appraisal process (a long and painful process that I have been through). My suggestion would be to link executive compensation to the availability of financial information for shareholders. If shareholders don't have access to timely, possibly defined as one year old or less, financial information that the SEC deems necessary (financials could simply be posted to the companies website) then the CEO cannot pay themselves any amount over $50k (or some low amount). I bet the SEC would have almost 100% compliance with any financial reporting requirements if a simple adjustment like this was made. Thanks and please reach out if you have any questions. I am happy to provide any additional information or comments that I can on this important matter. Tim Bergin