There is a great deal of abuse going on in OTC Bulletin Board Market and a lot of money is being made as result of it. Regulators are trying to deal with problem but are unable to put a halt to it, unless they take drastic steps which will be detrimental to small and micro-cap market.
The small and micro-cap market is an essential part in bringing small and mid-size companies public through Reverse merger and Regulation D (504) offering, these are two most popular methods used by small and mid-size companies to go public.
This two avenues are prefer by small and mid size companies because they simpler and less expensive than traditional IPO, It can be refer to as a simplified fast track method by which a private company can become a public company.
I described process in detail how small and mid-size companies can go public in previous articles, if you miss them, you can email me and I will be happy to explain it.
I have over 25 years of experience in securities industry as market maker and trader. In my own brokerage firm and with a couple of largest wholesalers in Wall Street. I believe my experience qualify me to write on subject with clarity and honesty from a birds eye view.
I believe in short selling as a legitimate way of providing liquidity to market as an essential part market making, that is not what I am referring to.
A short position is established when somebody sells a stock they do not own hoping to be able to buy it bac at a later day for a lower price.
There are several reasons why selling short stock of companies that have gone public through a reverse merger is profitable and easy, I will identify them and suggest ways that this can be stopped once all for all without affecting legitimate short seller who are willing to sell and bear risks associated with carrying a short position. Reason number one (1). Corporate shells, in order for an operating private company to go public in a Reverse merger it must merger with a public shell. A public shell is what remains when a public company is bankrupt or liquidated, also some shell are created as Blank Check companies,
A Blank Check company has shareholder and maybe some cash in its books but nothing else, they are created by enterprising entrepreneurs for sole purpose of merging an operating private company into it.
What happens is that when shell owner sell shell to private company he retains 5-15% of shares for himself, on top of collecting any where upward of $500,000.00 for himself. And even if he signed and agreement not to sell for a year, most of these people can not be trusted and will at some point dump stock or have somebody create a short position in their behalf.
Solution: The shell owner must be made to sell entire position and be content with money, which in most cases represents an enormous profit. I don’t have anything against anybody making a lot of money, I am all for it because I also stand to make a lot of money, I am against way they do it.