Nanalyze

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:

 OTC_Nano_Stocks

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:

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.

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  • DNWPIV

    Following “Nanalyze” and “nano start ups” since 2004, I agree with your observations and conclusions regarding some OTC companies with disruptive technologies, particularly in nano technology. It is sad that many individuals running these companies killed off some good ideas in disruptive technologies by making fast and easy money with the “hype and milk investors” strategy instead of trying to make the world a better place and make money for those who believed in
    their BS.

  • CE

    General comment of appreciation for you good folks at nanalyze: I appreciate your format of advertising on this site: traditional (and most important: non-intrusive) banner ads, paired with contextually relevant investing solutions within your content.

    I think you guys are doing it right and I just wanted to say that, as a content consumer, it is appreciated!

    • Nanalyze

      Thank you very much for your kind words! Just today we turned down one of the many offers we get to put in place more ads. We’re in the process of designing a new website and will keep the same approach we have now. The contextually relevant firms that we engage in affiliate marketing with are products we use ourselves in the majority of cases. It’s really great to hear when our readers recognize that and appreciate it. Thank you!

      • CE

        You’re so welcome. Thanks for doing content (and advertising) right. Enjoying the site and I’ll be back regularly (and with Adblock off)!

        Keep up the great work!

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