Trader Talk

Trader Talk: How can a company with a $35 billion market cap have no revenues?

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The SEC recently suspended trading in a little-known stock, Neuromama (NERO), which trades on the Pink Sheets.

The stock had gone from $15 in April to $56 with a market cap of an eye-popping $35 billion. With no revenues. This for a company that appears to be little more than an internet search engine, though it claims it is much more.

The SEC suspended trading until August 26th "because of concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the identity of the persons in control of the company's operations and management, false statements to company shareholders and/or potential investors that the company has an application pending for listing on the NASDAQ Stock Market, and potentially manipulative transactions in the company's stock."

Yikes. I won't go into details about what roused the SEC's suspicion, but you can get an inkling here.

Neuromama and the SEC did not immediately respond to CNBC's request for comment.

This has brought on the usual howls of incredulity about how this could possibly happen in the 21st century. How could a company that appears to be little more than a search engine (though they claim differently) get to a $35 billion market cap?

It can happen because this is a Pink Sheets listing. That is the bottom of the barrel of stock listings.

We all know the NYSE and Nasdaq have stringent listing requirements. But there are thousands of small companies that can't pass those stringent requirements. For them, there is over-the-counter (OTC).

OTC listings have become consolidated through one company, OTC Markets. There are three "levels" of markets: OTCQX, the "best" market with the highest standards, the OTCQB or "Venture" market which still have standards but are lower than OTCQX (annual verification and management certification processes), and OTC Pink, the "open" market that is sub-categorized by the level of information they provide.

NERO was listed as "limited information" which is "designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available."

In other words, this thing had a red flag a mile wide on it. It didn't quite say "You ought to have your head examined if you play with this" but it might as well have.

In fact, it had more than a red flag on it. On June 16, after the stock had its first run-up, the OTC Markets itself pasted its "Skull and Crossbones" on the NERO markets page. This "caveat emptor" or "buyer beware" sign is put up when OTC Markets believes "there is a public interest concern associated with the company, which may include a spam campaign, questionable stock promotion, known investigation of fraudulent activity committed by the company or insiders, regulatory suspensions, or disruptive corporate actions."

From that point on, it's unlikely any broker would be chatting this stock up.

Amazingly, a few people apparently didn't get the memo. Or maybe they didn't need to. The stock kept rising, from roughly $40 to roughly $53 before it was suspended on Monday.

How could this have happened? With a skull and crossbones on the OTC Markets page? It's possible that there was a short squeeze of some kind. But no, there is no short interest in the name. In fact, there is no appreciable stock available to borrow.

What does that mean? "This implies that principal shareholders are holding on to most of the stock," Ihor Dusaniwsky told me. Ihor is with S3 Partners, a financial analytics firm.

The trading pattern might also suggest this. Volume has been minuscule. Only 3,713 shares traded in July, when it went from $50 to $56, and only 250 shares in August!

The stock goes from $50 to $56, an increase of 12 percent, on just 3,713 shares? Bear in mind, this increased the market cap of the company by roughly $3.8 billion.

What does this mean? Here's Ihor again: "It suggests to me that a very small amount of people are buying the stock among themselves."

What can we learn from this? There were certainly ample warning signs.

The SEC should act more quickly in cases like these. A stock with no revenues and a market cap of $35 billion should be looked into. It likely did not arouse the SEC's indignation because the level of trading was so low and it obviously has not impacted many people. True enough, but a quicker response was certainly warranted.

As for the OTC Markets, it's easy to say it's a land of crazy people and scammers. There's certainly some of that, but keep it in perspective.

There are 10,000 securities that trade on the three OTC Markets platforms. OTC Markets officials I have spoken with regard their market as a breeding ground for companies to be able to grow and potentially "graduate" to the Nasdaq or NYSE. In the last three years, over 200 companies have moved from the OTC Markets to the Nasdaq or the NYSE.