Many retail traders who buy OTC securities are panicking right now — but is it really that big of a deal?
Yesterday, E*TRADE sent out an email to users about new rules set to be adopted by the SEC later this year.
That email started off with this message, “New rules will affect your ability to buy and sell “Pink No Information” securities, including at E*TRADE.”
Those rules are set to take effect September 28, 2021, and are amendments adopted by the SEC to its Exchange Act Rule 15c2-11.
Retail trading chatrooms cranked up the doom. Will this demolish OTCs? Is it time to hang up your day-trading hat?
Not even close, says prominent penny stock trader, educator, and philanthropist Timothy Sykes. In fact, he says these new rules are in your favor.
“It’s good to clean up the gutter,” says Sykes. “There’s always gonna be small companies pumping themselves up. There’s always gonna be promoters who are the ones doing it. There’s always gonna be suckers who don’t study enough and they fall for it. All of this creates this whole niche, this whole ugly gutter of a market.”
Timothy Sykes (Image credit: Millionaire Media, LLC)
Table of Contents
What Are Pink No Information Securities?
To understand how these new rules will impact traders, we first must cover what these securities are.
Investopedia defines Pink No Information Securities as “the lowest and most speculative tier of the three marketplaces for the trading of over-the-counter (OTC) stocks.”
All three of those tiers are operated by the OTC Markets Group which allows investors and traders to buy stock in companies not listed on national exchanges like the New York Stock Exchange or the NASDAQ.
But OTC Pink is easily the riskiest tier for traders to buy into in the OTC market.
Companies listed on that tier are not held to the same disclosure requirements or financial standards as companies traded on major exchanges.
There are three classifications of OTC Pink companies, defined by Investopedia as follows:
- Current Information companies are those that follow the International Reporting Standard or Alternative Reporting Standard. These companies make filings publicly available through the OTC Disclosure & News Service.
- Limited Information companies include troubled firms in financial distress, bankruptcy, or those with accounting issues. This category also includes companies that are unwilling to meet the OTC Pink Basic Disclosure Guidelines.
- No Information companies are those businesses that do not provide any disclosure at all.
Editorial credit: AevanStock / Shutterstock.com
What Are The New SEC Rules?
Now that we’ve covered what OTC Pink stocks are, let’s discuss how these new regulations from the SEC will impact that market.
On September 16, 2020, the SEC amended its Exchange Act Rule 15c2-11 with the new changes now taking effect this September.
The SEC says this amendment “enhances disclosure and investor protection in the OTC market by ensuring that broker-dealers, in their role as professional gatekeepers to this market, do not publish quotations for an issuer’s security when current issuer information is not publicly available, subject to certain exceptions.”
Ultimately that means everyday retail traders would no longer be able to buy these non-reporting OTC Pink stocks.
“This is a good thing. This is how you clean up markets.” Sykes says. “It will force a lot of non-reporting companies that have gotten away with it in the past, they’re gonna start reporting because they don’t want to get their stock de-listed so it makes them better. It’s like ‘a rising tide lifts all boats.’”
The new regulations would push securities that currently trade on the Pink Market and do not disclose financial information onto the Gray Market instead.
Editorial credit: dennizn / Shutterstock.com
Investopedia defines the Gray Market as “unofficial, over-the-counter (OTC) transactions in a security”.
Securities traded on this market “have been suspended from official trading” or “have not yet begun official trading on an exchange.”
But the SEC is also considering a proposal to establish an “Expert Market” for the unregulated OTC Pink stocks that will be impacted by its new rule.
That “Expert Market” would “grant exemptive relief, subject to certain conditions, to permit broker-dealers to publish or submit proprietary quotations for securities, on a continuous basis, in a market where the distribution of such quotations is restricted to sophisticated or professional investors, without complying with the information review and recordkeeping requirements of Amended Rule 15c2-11(a)(1)(i) and (d)(1)(i)(A), respectively.”
Basically, the establishment of an expert market would allow sophisticated high-risk investors to still buy risky OTC Pink stocks while protecting retail traders from exposure to those extremely high-risk buys.
Image credit: Rawpixel.com/Shutterstock.com
Wouldn’t This Create Less Trading Opportunity?
The biggest concern among traders following E*TRADE’s announcement was that this new rule will create fewer trading opportunities.
But Sykes says that’s nothing to be worried about and there will still be plenty of opportunities in the OTC market.
“There have been so many rules that have come and gone. You just adapt. Don’t worry about what you can’t control,” he states.
The key to help overcome this change, he says, is studying.
“I just take it one trade at a time,” he says. “I don’t worry about bull markets, I don’t worry about bear markets, I don’t worry about crashes. I just am so prepared because I’ve been around for over 20 years. Anybody worrying about rules like this — it’s because you haven’t studied enough.”
Timothy Sykes (Image credit: Millionaire Media, LLC)
Sykes compared the panic about this rule change to the misunderstanding of the pattern day trader rule and how that impacts traders.
“If you’re ever worried about the future, guess what, the answer is hidden in the past,” he says. “The more you study the past, the less concerned about the future you’ll be and you’ll simply react instead of trying to predict.”
Sykes says all the government is trying to do is protect traders from exposing themselves to unnecessary risk.
“Over 90% of traders lose. The government is trying to save the dumb, ignorant, irresponsible newbies from themselves. This is another new rule trying to keep people from investing in the worst of the worst companies. More plays, less plays, I just take it one day at a time. Again, stop worrying and go study.”
Featured Cover image: iQoncept/Shutterstock.com
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Thank you Tim!!!! great read and thanks for the info and laying it out!!!! Study study study!!!!
holding swing over 50 companies pink shares what to do keep or not? tnx
Which specific companies are OTC Pink companies?
CJ
search the company you are interested on otcmarkets.com and it will tell you what tier they are in.
so what happens to the common retail investors stock in one of these pink over the counters. For If example INVT currently in litigation with Apple and looking at a law settlement although right now It’s only trading at 3 cents. it’s worth the risk to me to see the outcome but am I ever going to be able to sell these shares? I’m not a professional
Knowledge supports growth.
Exactly!
Welcome to the promulgation of the Nanny state, what they fail to mention is that the greater the risk the greater the return. People who invest in these stocks are not guaranteed a return but are investing based on the upside of the unknown. Another example of the government trying to control your life. If you don’t want risk, then put your money in your piggybank and watch the returns…if you are an adult, then pull up your big girl pants and be ready for risk.
So the ones with the opportunity to clean up come up with these rules and bambozzle
long term opportunities… bought at loss pennies on the dollar. Money grab
they should enforce naked short selling first
I got schooled. Let the pink sheet purchasers DECIDE for themselves.
Newbie or nit.
Just don’t let them leverage, short and all the fancy types of trades. Buy and sell, though, go for it, newbie. Otherwise, it’s just wrong.
How about the SEC do something about the naked short selling?
SEC is corrupt as hell.
Hit the nail on the head.
Abselutly correct.
How can any stock be a good stock to buy, when
Naked short sellers rule
The SEC & FINRA!
Knowledge supports growth & development.