Stephen Sinclair is a Canadian freelance writer who has been publishing professionally for several years.
Should Companies With No Revenues Be Permitted to Sell Stock?
As a result of my research into the seemingly fraudulent nature of the stocks of companies with no revenues and no profits that trade on the TSX Venture Exchange and Toronto Stock Exchange, I have been forced to consider the question: Just what is a stock? After consulting with industry professionals, and taking an in-depth look at the subject, I came to a startling discovery: the word stock is not defined by either the U.S. Securities Act of 1933 or the Ontario Securities Act, the two most powerful pieces of legislation governing the stock market in North America.
Shares issued by companies like Facebook, Inc. (Nasdaq: FB) who not only generate revenues and profits, but are debt-free, and have gained over 200 percent since coming public, are viewed the same under the law as shares, down over 99 percent, issued by Goldstar Minerals Inc. (TSXV: GDM), which has never produced a dime in revenue or profits.
In the United States, when investors lose 99-plus percent in shares issued by companies without revenue or profits, criminal investigations result. The 2013 film, The Wolf of Wall Street, featuring the life and times of Jordan Belfort, features just such a story. Yet, in Canada, the federal government actually encourages operators who sell stock in seemingly comparable firms with a tax break, known as the flow-through share program. For example, in 2012, Goldstar reported on a $1.3 million flow-through deal. Whoever bought the block of shares in that private placement likely flipped them onto smaller investors, who, if they have held them, have lost more than 99 percent. The Canadian government gave the buyer of the private placement a tax break to do so.
So, it appears that the Government of Canada is in the business of distributing stocks that would very well result in criminal investigations in the United States, which is a completely absurd situation. It would seem that the buyer of a private placement of a block of shares that have gone on to lose more than 99 percent would have had some idea that such a future was in store for them. Given this, at least some of those who distribute stock in companies with no revenues that go on to lose most of their value are carrying secrets, and have been dishonest, which creates motive.
For example, it appears that buyers of private placements have several methods at their disposal to entice buyers to place buy orders for their stock on the TSX Venture and other exchanges. One of these would be telling an elderly person that they think the stock is going to go up, and that they should buy a significant amount of it. Once a targeted senior citizen, or other pigeon, agrees to do so, all the private placement buyer needs to do is sell their shares to them on the open market. If the buyer of the 2012 private placement sold their shares to senior citizens, they have lost over 99 percent.
Option Time-Value Decay
Penny Stock Time-Value Decay
How is this possible? How can the shares of real companies, with real prospects like Facebook, get mixed in with the shares of companies like Goldstar? To learn the answer, we need to travel back in time, to 1602, when the Dutch East India Company offered the very first stock. Like Facebook, the Dutch East India Company generated both revenue and profits. Further, beyond what Facebook currently offers, the Dutch East India Company also paid dividends of 12 to 63 percent during its first years in business. Investors simply would not have laid down cash to purchase paper based on vague promises of future dividends, unless substantial enough to make the risk worthwhile.
Over the years, word spread about stocks. Fortunes were made in the stock market. The aura surrounding stock came to be compelling enough that companies no longer needed to pay dividends, people just wanted to own stock. As more time passed, the public's love of stocks allowed companies without profits to issue shares, and then, finally, we arrived at the situation we face today: hundreds, if not thousands, of companies with no revenues and no profits issuing stock, at lower and lower prices.
Investors in the first Dutch East India Company offering, presented with shares in Goldstar Minerals, would likely have held their stomachs and laughed. They almost certainly wouldn't have bought the shares. If the very first stock buyers wouldn't have considered the stock issued by Goldstar Minerals, and others like it, to be stock, then a fair question would seem to be, "Is it really stock?"
More than one person has commented on the similarity between how the market values out-of-the-money-call options and penny stocks without revenues and profits. It has been observed that penny stocks are very similar to perpetual zero-strike call options. At first, I proposed that the stock of companies without revenues be reclassified as an option. However, after consulting with industry experts, I discovered that, despite these similarities, renaming penny stocks to call options is not a workable solution.
I then considered that companies without revenues are actually issuing a different type of equity. Working from the Latin root of "corporation," which derives from "corporare," which means "to combine in one body," I considered the Latin root of the word "speculation," which is "specere," or "to look." Could it be that a more accurate, more "full, true and plain" description of a corporation with no revenue and no profit is "speculation?" I believe it is.
Instead of stock, speculations issue speck, and instead of shares, shyres. Speculations are governed by articles of inspeculation. Some companies, who use the word corporation in their names, would be required to use "speculation" or "inspeculated" instead. Further, participants in the option market understand that there is a very good possibility that an option could lose most or all of its value. It is not clear that the buyers of penny stocks with no revenues enjoy the same level of disclosure.
By renaming the stock issued by revenue-less companies to speck, a built-in warning system is offered to naive, mom-and-pop retail investors, raising a red flag that the investment they are being sold is not comparable to stock in Facebook, and is so different that it might as well be called by another, ridiculous-sounding name. Further, with the ability to deceive investors greatly diminished, buyers of private placements who appear to be involved in distributing worthless stock would no longer carry motive to conceal their dark secrets. It would seem that a buyer of a private placement who was depending on profits might be motivated to commit nefarious acts up to and including murder, should someone learn their secret and inform, or be in a position of potentially informing, whoever it is they are targeting to buy their worthless stock.
In summary, stock is not defined by current U.S. or Canadian legislation. The very first stock buyers, who helped define the concept, would probably not have purchased stock issued by companies without revenues and profits. This suggests that stock issued by these firms is not actually stock, but something else, possibly best defined by the words speculation, speck, and shyre.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Stephen Sinclair