Friday, October 12, 2018

SEC Considers Blocking Dark Stocks

The SEC has a series of round table discussions to combat penny stock fraud.  One horrible proposal they discussed is, “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,”

This would mean death for dark stock investing.  The SEC is taking comments on these proposals as feedback on their Equity Market Structure Roundtables.  Tell them what you think.

This ridiculous idea was mentioned here in a bloomberg article.   Below is the email comment I sent in.  All the comments are online here including mine.  A few other good comments are here, here, and here.  Feel free to copy from mine if you'd like.

Here is how you can submit a comment.  Just send an email to and mention "File No. 265-31" in the subject line.

Below is my email to the SEC.  You can read more about the SEC rule 12G here.  And a discussion on the state laws here.

disclosure: long MRCR, ADDC

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From: Dan Schum <>
Date: Thu, Oct 11, 2018 at 11:03 PM
Subject: File No. 265-31 comments
To: <>

To Whom it may Concern,

I would like to address the comments made in the attached article by Brett Redfearn.  Specifically this suggestion, "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,” Redfearn said Monday at the Securities Industry and Financial Markets Association’s annual meeting in Washington."

I applaud efforts to get rid of fraud but if implemented this rule would destroy the market value of many legitimate businesses and along with it the savings of many retail investors.  This idea casts far too wide a net.  You are trying to protect retail investors when in fact this rule would hurt primarily retail investors.  The companies toeing this line between filing and non-filing are often so small in market cap and their stocks so illiquid funds cannot participate.  I invest primarily in companies in this area and blog about it at  My page views and contact with fellow investors tells me there are many others out there like me.  Do not punish us for seeking an area of the market where we have less competition.  Stopping quotes or trading in these securities would send their stock prices to nothing.  

One example for you is Moro Corporation.  They de-registered from the SEC with the intent to continue communicating but they have few employees and those in charge were old.  The main shareholder had the title of president, CEO, and chairman of the board.  Money was tight so the CEO stopped taking a salary.  The CFO had health problems and had to take time off so the over-worked CEO added CFO duties to his workload.  As you can imagine they slipped behind in their reporting.  Now do you think they, and their shareholders, deserve to be punished?  

Another is Addmaster.  This company has been around for decades.  They hold an annual meeting and send an annual report to shareholders.  Any questions you have they are happy to answer.  But they de-registered from the SEC and don't file reports in the public domain.  Do you think their shareholders deserve to see the share price drop to nothing?  Should my savings be erased?

I could go on.

A better solution would be to change the SEC rule 12G that allows companies to file form 15, de-register, and disappear.  This rule should be aligned with the many state laws that require annual reporting and an annual meeting.  Attack the problem at its source.  I have talked to a number of companies that de-registered from the SEC and they all did it to save money.  I have heard estimates from several hundred thousand dollars to a million and a half.  That is a giant cost for tiny companies that may only have a few million in revenue.  The cost to stay SEC reporting is the number one reason companies de-register and disappear, leading to the exact situation you are trying to resolve!  

The SEC should provide and enforce a lower tier of reporting standards that is more affordable.  This will enable companies to save money while helping investors stay informed. As per current SEC rules once a company de-registers they are free to stop communicating all together.  Put an end to this rule and require companies to file annual financial statements.  Align with state law.  Many state laws require businesses to keep annual financial numbers and provide them to shareholders upon request.  Delaware state Corporation Law Title 8, Chapter 1, §220 Inspection of books and records states that shareholders must be allowed to inspect the company books.   §211 requires an annual shareholder meeting. New York’s Business Corporation Law §624 states a company must produce for inspection an annual balance sheet and profit and loss statement.   §602 requires an annual shareholder meeting.  There are other states with similar laws.  

I urge you to consider the legitimate businesses that would be swept up in your idea.  Do not suspend quotes or block out stocks just because they have not filed a report in 6 months.  

Thank you,
Dan Schum

individual investor
micro-cap and nano-cap stock blogger


  1. Below is the email I sent:

    While I admire the SEC's efforts to clean up some of the darker corners of the investing market, I think the proposed efforts are going about it backwards.

    Often a company does not want to be public, yet it still has an obligation to its shareholders. Companies like that often request an NDA (non-disclosure agreement) before releasing financials to shareholders (I can send you such requests I have been sent). These companies are hiding from investors so that they can over pay themselves at shareholders expense. Your proposal would further embolden those companies that already wish they were private.

    A better solution, the SEC should provide a costless way for shareholders to request financials, 220 demands, and all things they have the right to receive that companies sometimes refuse. This would unburden shareholders of incurring legal fees to get what they are legally entitled to do.

    If you want financials to be sent, and I agree that is a great idea, a better way would be to disallow board members, and executives to receive compensation if basic shareholder demands aren't met.

    Please punish the correct people, the cost should be borne by those hoarding information. Not allowing trading punishes the holders of such securities, not those that are in the wrong.



  2. I'll submit a letter as well. What is the timeline for this? Could it go from comments straight to a rule being put in place, or do they have to formally propose the rule and take comments? Depending on the answer to that,you would almost have to consider liquidating all your holdings ahead of it possibly happening, wouldn't you? While I don't have huge positions in any one of these stocks, collectively they total more than I can probably risk if they were to all be wiped out at once.

  3. I have no idea on a timeline. I would guess they move slow and it’d take a long time to get anything implemented. But I have no information on this part

    I think these are just discussions and from here it would take the SEC internally defining a rules proposal

  4. these guys have to file a tax return. so they have the financial statements. they have all the information but don't want you the 'owner' to read it. it cost less than $20 to have it published or post on investorshub or yahoo for nothing. they don't want to report the financial statements. either they would have to pay tax on it. and get in trouble with SEC if it's false. just go to the company headquarter office and demand it in person. and keep calling the company. they owe your the financial reports.

  5. What's the latest on this, Dan?

    1. unfortunately it seems to be moving forward. I just put up another blog post on the topic: