--Hundreds of companies trade for fractions of a penny
--Trades typically unprofitable for brokers
--Company in spotlight says auditing costs prohibited
filings
By Drew FitzGerald
A bogus press release trumpeting the $400 million buyout of an
obscure Rhode Island Wi-Fi provider shed new light on stocks that
trade for fractions of a penny, a corner of the market that rarely
enjoys positive attention.
ICOA Inc. (ICOA) of Warwick, R.I., was the latest so-called
penny stock in the spotlight Monday, after a public-relations
service flashed a press release disclosing that Google Inc. (GOOG)
had acquired the company, which manages wireless Internet networks
for airports, cafes and other public spaces. The identity of
whoever issued the phony press release remains unknown.
ICOA denied the report, but not before several online news
outlets picked up the false story. Google's growing interest in
wireless network infrastructure lent the deal an air of
credibility, but a closer look at ICOA and the press release
revealed holes. ICOA has six employees and generated $85,000 of
revenue last year, making a price tag of $400 million seem less
plausible. Plus, the release contained some typos and awkward
phrasing.
Then there was the market value: ICOA recently traded at 1/100th
of a cent over the counter, giving it a roughly $800,000
capitalization. That's far too low for listing on the major U.S.
exchanges but common on the loosely regulated over-the-counter
market called OTC Pink. According to OTC Markets Group Inc., which
operates a trading platform for stocks that don't list on U.S.
exchanges, more than 450 securities changed hands at 1/10th of a
cent or less last month.
Such prices make for brisk volume on the OTC market, though
trade is far less valuable than on the big U.S. exchanges. OTC
securities changed hands 6.55 billion times Monday, eclipsing the
2.86 billion shares traded on the New York Stock Exchange. OTC
dollar volume reached only $359.2 million, however, well short of
the $19.73 billion traded through the NYSE.
Trading in ICOA accounted for 3.34 billion of Monday's OTC
volume, worth $594,235 after shares briefly spiked and returned
back to their starting point. At Monday's close, 100 shares of ICOA
still cost a penny.
Companies that trade on OTC Pink don't face the same reporting
requirements as those stocks on the major exchanges. Erwin Vahlsing
Jr., ICOA's chief financial officer, said high auditing costs
prevented the company from filing timely financial reports with the
Securities and Exchange Commission, though he hopes to return the
company to a higher tier--and a stronger share price--by filing new
statements next year.
ICOA's small share price puts it on the bottom rung of quote
listings offered by OTC Markets Group. It also hurts the company's
efforts to raise capital, Mr. Vahlsing said, because some brokers
refuse to deal with the securities.
"From what I understand, the broker-dealers have become very
segmented," he said. "There's unfortunately this backwater that
these companies find themselves in, ours included."
It's unprofitable for broker-dealers covering fees to trade the
smallest penny stocks, which might yield an even tinier commission.
Many do so anyway, both to maintain relationships with customers
holding more traditional stocks and to avoid the appearance of
violating rules that bar brokers from acting as financial
advisers.
"Because brokers can't give advice on a penny stock, it's really
hard for them to warn investors not to buy it," said Cromwell
Coulson, OTC Markets Group's chief executive.
Mr. Coulson said OTC Markets strives to warn investors about
companies that haven't supplied complete financial information,
adding symbols such as stop signs or ominous skulls-and-crossbones
next to securities that didn't supply complete public information.
Some retail investors still pursue stocks with little information,
however.
"There's a whole bunch of people who like to speculate on these
things," Mr. Coulson said. "They just trade among themselves."
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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