This month the SEC temporarily suspended 255 dormant companies from trading as part of Operation Shell-Expel.
A SEC official said: "A frequent element in pump-and-dump schemes has been the use of dormant shells. Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading shells."
The 255 companies were suspended from February 3 until yesterday.
The commission took the action "because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning the companies' operating status".
It warned brokers and dealers that no quotation could be entered into, even when the suspensions were lifted, until the suspended companies had fully complied with Rule 15c2-11, requiring full disclosure of their financial positions and activities.
In light of the SEC's strong position regarding penny stocks and the activities of Jordan Belfort in The Wolf of Wall Street, should we suspend these companies in New Zealand?
The SEC defines a penny stock as "a security issued by a very small company that trades at less than US$5 per share". In the United States penny stocks are usually traded over-the-counter although some are listed on recognised stock exchanges.
Over-the-counter (OTC) markets are mainly electronic inter-dealer quotation systems that display quotes, last-sale prices and volume information for securities not listed on recognised stock exchanges.
In general OTC markets are less transparent and less regulated than recognised stock exchanges.
This column has defined domestic penny stocks as NZX companies trading at 3c a share or less. But it is important to note that not all are dormant or shell companies.
Just over two years ago, this column looked at the 13 penny stocks listed on the NZX at the time.
An update of these 13 companies leads to the conclusion that there is no need to suspend penny stocks in New Zealand.
Penny Stocks - searching for a better life
Wednesday closing prices and market values
A summary of the evolution of these companies is:
• The combined market value of the 13 companies has increased from $36.9 million in January 2012 to $177.3 million, although some of this has been achieved through new capital raisings.
• Two companies have effectively disappeared. Allan Hawkins' Cynotech delisted after going into liquidation, and Insurance Group, chaired by former Crown minister and Lombard Finance director Bill Jeffries, was suspended by the NZX late last year for failing to produce its 2013 annual report.
• Seven of the 11 remaining companies still trade below 3c a share.
• The share price of Salvus Strategic, now called Veritas Investments, has soared from 2.5c to $1.30 but this is mainly because of a 1 for 25 share consolidation 12 months ago.
• The two companies with the largest increase in market value are Salvus, now operating the Mad Butcher business, which has soared from $500,000 to $48.5 million, and Velo Capital, now called VMob Group, which has climbed from $900,000 to $48.5 million since January 2012. Salvus and Velo both issued a large number of shares to acquire new assets.
• GFNZ, which operates Geneva Finance, exited its moratorium last year after repaying $169 million, including $42 million of interest, to investors. The company's recent interim report said "there remain a number of challenges ahead".
• Heritage Gold, now called New Talisman Gold Mine, continues to struggle but it is hoping that a Chinese investment group will fund $10.9 million of its mine's development in return for 20,930 ounces of gold.
• Investment Research has changed its name to Vetilot and is looking for a new investment. The company recently received a public censure and a $40,000 fine for breaches of NZX rules. This is a clear sign that the NZX is carefully monitoring low-priced dormant companies.
• NZF, which also struggles to survive, was censured and fined $35,000 by the NZX last month. This is another clear indication that the NZX is closely monitoring penny stocks.
• Orion Minerals, which has had more lives than a cat, has US$7.3 million of cash and is controlled by Chinese interests. Orion has set up a wholly owned Australian subsidiary called China Scrap Metal Resources, which "will market scrap into the international scrap metal markets".
• RIS, which was also censured and fined $40,000 by the NZX last year, has sold its main asset to a Bombay Stock Exchange listed company and is looking for a new activity.
• Savoy Equities recently changed its name to Promisia Integrative to reflect "its focus on the development of natural products for the treatment and control of disease, including arthritis".
• TRS Investments announced in December 2012 that it would acquire mining interests in Southland. However, progress is slow, and the last TRS announcement, in November last year, promising further information on the mining acquisition within weeks has yet to appear.
Our penny stocks are a fairly motley bunch but they are well monitored by the NZX and there have been no obvious signs of market manipulation or pumping-and-dumping in recent years.
The last high-profile evidence of share price hyping was Plus SMS nearly a decade ago.
Plus SMS started making positive announcements soon after it changed its name from RetailX in July 2005.
Additional shares were placed with investors well below the market price, a large number of options were exercised at 10c and there was widespread selling by insiders.
Plus SMS's share price peaked on November 14, 2005 at 82c, giving the company a total market value of $262 million even though it was generating no revenue.
The Securities Commission did not take any action because there was "no evidence of an intention on the part of Plus SMS directors to deceive or mislead the market".
Investors can be fairly sure that the Financial Markets Authority, which replaced the Securities Commission, would take a much more aggressive approach to individuals involved in activities that have any pump-and-dump characteristics.
Thus with the NZX and FMA taking a much more proactive approach towards regulation our penny stocks remain an important part of the sharemarket and should not be suspended.
They are a high-risk investment but they offer an opportunity for poorly performing companies to recreate themselves.
A disappointing aspect of this end of the market is that there have been four new additions to the sub-3c a share list in the past two years - e Aorere Resources (0.8c), Blis Technologies (2c), Glass Earth (1.5c)) and Wool Equities (2c).
Will these companies survive in their present form or will they be used as a back door listing in the next year or two?
• Brian Gaynor is an executive director of Milford Asset Management.
