Tuesday, March 06, 2007

Pink Sheets Takes AIM

Photobucket - Video and Image Hosting With a conscious nod to London’s Alternative Investment Market (AIM), Pink Sheets LLC has launched a new designation called OTCQX for domestic and international companies that meet certain criteria. In a March 5, 2007 press release (here), Pink Sheets announced that it had launched the designation for “reputable operating companies that wish to create enhanced visibility and respectability with investors.”

Pink Sheets is an electronic quotation system and not a stock exchange. It has no listing standards, nor do its companies have to register with the SEC. According to a March 6, 2007 Wall Street Journal article entitled “Pink Sheets Tries to Spiff Up Its Image” (here, subscription required) there are about 8,200 stocks quoted on the Pink Sheets and the OTC markets combined. Of these, 600 are foreign shares. Many of the companies “are speculative” and “some are distressed.” Some of the shares can go weeks or months without any trading, creating liquidity concerns. A Wikipedia article providing background on Pink Sheets can be found here.

The new Pink Sheets designation is intended as a “simple listing process that allows trusted companies to efficiently distinguish themselves.” So far 3 U.S. companies and 3 non-U.S. companies have qualified, and Pink Sheets says that it is “processing applications from 20 additional companies.”

The new designation is available for U.S. companies “with ongoing business operations that have professional advisors and provide credible disclosure,” including annual GAAP audited financial statements. The International designation is available for non-U.S. based companies “listed on a qualified international stock exchange that makes their home country disclosures available in English to U.S. investors.”

All companies seeking the new designation must have professional advisors. U.S. based companies must nominate a “Designated Advisor for Disclosure” (DAD) and each non-U.S. based company must nominate a “Principal American Liaison.” (PAL) prior to being accepted for the designation. According to Pink Sheets’ press release, the DAD and PAL designations are modeled on AIM’s Nominated Advisors (NOMAD). These advisors role is designed to “bolster investor confidence in the quality and availability of issuer disclosure.”

The new Pink Sheets designation, with its DAD and PAL advisors, is a clear effort to emulate the AIM and perhaps to replicate some of its success. However, Pink Sheets labors under a couple of handicaps that will challenge its efforts to compete with AIM. First, unlike AIM, which is affiliated with and supported by the London Stock Exchange, Pink Sheets is not affiliated with any exchange. AIM enjoys reflected prestige of its well-respected parent. Pink Sheets has only its own reputation, such as it is.

Even though AIM itself has had a rash of recent investigations (refer here), its reputation remains more or less solid. Pink Sheets, by contrast has a legacy that has caused the SEC to post on its website (here) strong warnings about the listing service, stating, among other things, “companies quoted on the Pink Sheets can be among the most risky investments” and “you should take extra care to thoroughly research any company quoted exclusively on the Pink Sheets (emphasis in original).”

But these concerns notwithstanding, Pink Sheets’ attempt to copy the successful elements of the AIM is one of the more economically rational responses to the competitive challenge that the AIM poses for U.S. financial markets. Pink Sheets may have a very long way to go before it presents serious competition to the AIM, but it has made a start, and its attempt to renovate itself to offer an alternative to AIM is preferable to the would-be reformers efforts to reduce the mainstream exchanges’ regulatory standards as a response to AIM’s competition.

All of that said, the regrettable DAD and PAL advisor designations are too cute to take seriously. Those features were better left on the cutting room floor.

Now This: According to The Economist magazine (here, subscription required) the new generation of container ships are being built to enormous proportions. The Emma Maersk, which is the largest container ship ever built, can carry 11,000 20-foot containers (1,400 more than any other ship can carry). A train carrying that load would be 44 miles long! Its engine has as much power as 1,200 automobiles and its anchor "weighs as much as five african elephants." Yet, according to Wikipedia (here), its normal crew is only 13 people. That's a little scary now, isn't it?

These mega-ships are too large for the Panama canal. Ships that fit the dimensions of the Panama canal are known as Panamax. (The new mega vessals are known as "Post-Panamax,"and the canal will soon be modified to accomodate them.) To picture what it means for the Panama canal to have vessels designed to maximize its capacity, view this timelapse video of the canal in operation. This is solid visual evidence of what global oceanborne trade really means. (You think your job is complicated...)

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