Acquisition Hoax Spotlights Pink-Sheet Market

--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 [e-mail]

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