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July 31, 2000

Cloudy Future for Bulletin Board Market

By William Hoffman

As a demutualized Nasdaq starts to act more like a big company, standards on the OTC Bulletin Board - operated by Nasdaq's parent, the NASD - will be tightened, according to the top executive at the bulletin board's main competitor.

"Look at it like the baseball farm league system," said Cromwell Coulson, chairman of the company that publishes the Pint Sheets. "We're the bush leagues."

Coulson was referring to the relationship between Nasdaq, the OTC Bulletin Board, and his Pink Sheets penny stock market.

As he sees it, the non-Nasdaq OTC market until recently was insignificant: roughly $2.5 million out of Nasdaq's $750 million in 1998 revenues.

But the non-Nasdaq OTC market could become an embarrassment to the name brand conscious "stock market for the 21st century".

"Do the [New York] Yankees stick their brand name on a bush league team? No," said Coulson, a former OTC market maker.

Life After Demutualization

No one seems to know what will become of the OTC Bulletin Board after demutualization - not even the National Association of Securities Dealers.

"We are considering various options, and have no further comment at this time," said Scott Peterson, spokesman for the NASD.

Peterson refused to discuss what options are being considered, or when a choice between them might be announced.

Regulators are stepping in. In June, the Securities and Exchange Commission sued scores of individuals and firms, including reputed organized crime figures, alleging a variety of offenses involving bulletin board stocks. Also in June, NASD Regulation, the regulatory arm of the NASD, finished implementing a new disclosure rule requiring that bulletin board companies file updated financial reports with the SEC.

The rule's year-long phase-in reduced Bulletin Board membership from 6,667 companies in June 1999, to 3,943 in June 2000.

Most of the companies kicked off have been landing on the Pink Sheets.

Unintended Consequences

If regulators believe they can stop OTC fraud by removing non-reporting companies, "all they're doing is moving it further underground to another venue," Leonard Mayer, chairman of the NASD's OTCBB advisory committee, told Dow Jones this summer. (Mayer could not be reached for comment on this story).

But Coulson said the Bulletin Board, "is always going to be a place that needs a lot of policing."

Press notices about thousands of firms thrown off the NASD's bulletin board can't be doing the market's brand name any good, he added.

"About the worst thing for us would be if Nasdaq said, We're shutting [the Bulletin Board] down, and we're going to let the Bulletin Board stocks go to the Pink Sheets'," Coulson said. "I don't know if they've thought about it."

But it might not be the worst decision for the ambitious Nasdaq, which recently negotiated exchange agreements based in part on its prestigious name in Europe and Japan.

Migration Pattern

Coulson believes the continuing bulletin board shakedown will force some firms to prepare for a move to Nasdaq, while others will migrate to the Pink Sheets.

As the Bulletin Board's ranks thin, he contended, Nasdaq is going to have to think about the future of its long-neglected microcap market.