The Dangers of Over the Counter (OTC) Stocks
When nanotechnology became mainstream in 2004-2005, many companies used this as an opportunity to incorporate the word nanotechnology into their company name or products, in particular over-the-counter (OTC) companies. Below are just a few of the companies that engaged in this practice:
8-9 years later we see that none of these companies were successful. Let’s say 10 years you invested 5000 dollars in each of these 6 companies for a total of 30,000 dollars. Today you would have exactly 80 cents. Here’s how each company performed:
- JMAR (OTCMKTS:JMAR): -100%
- Biophan (OTCMKTS:BIPH): -99%
- US Global Nanospace (OTCMKTS:USGA): -99%
- Industrial Nanotech (OTCMKTS:INTK): -96%
- Natural Nano (OTCMKTS:NNAN): -99%
- mPhase (OTCMKTS:XDSL): -99%
Warning Signs for OTC Companies
In observing a great number of OTC company failures, we have noted the following patterns followed by many OTC companies that fail:
- The company is usually recently founded through the reverse merger of a shell company and with the name changed accordingly to address a particular exciting disruptive technology such as 3D Printing, Nano Drug Delivery, Graphene, Solar, etc.)
- The company possesses one patent or a small number of patents that are said to address an application of said disruptive technology. These patents will usually be acquired in the reverse merger or invented by someone in senior management whose credentials and past successes are heavily touted.
- The company’s marketing materials, financial statements, SEC filings, etc will expand upon in great detail the size of the market opportunity and just how exciting of an opportunity exists as opposed to the success of their product in capturing revenue from said market application.
- Many individuals on stock message boards such as the ones found on Yahoo Finance will suddenly start posting messages touting the merits of the stock using phrases such as “load up”, “get on the train”, “the next Microsoft”, “easy ten bagger”, etc.
- Any constructive criticism of the company will be met with accusations of short selling when in fact the short selling of OTC stocks is very difficult and rare
- The company will not have any significant revenues but will keep announcing partnerships, memorandums of understanding, and agreements that never result in meaningful revenues.
- In addition to the original technology focus, the company will then start to identify other application opportunities for their technology when the original opportunity does not transpire
- They will then continue issuing private placements to support the company until the share price completely collapses and the long term shareholders are left holding shares that are worthless
It is important to note that senior management of the company are paid whether or not the company succeeds, in many cases very handsomely. They are not necessarily acting maliciously or are purposefully aware that others seek to manipulate the share price to their advantage and to leave long term investors left holding the bag.
As mentioned in a previous article, the SEC specifically warns against investing in companies that conduct reverse mergers. In the case of the 6 companies presented in this article, investors who ended up with worthless shares would have benefited from reading the SEC warning a bit earlier.