Image Credit: Christophe Vorlet
By Jason Zweig | June 10, 2016 10:24 am ET
In the stock market, more ownership seems to be concentrated in fewer hands all the time.
That’s been a worry for at least a century, since Louis Brandeis wrote his book “Other People’s Money.” But today’s financial technology has created an improbable scenario under which companies could use that concentration to put their investors in the dark.
Lumber Liquidators Holdings, the hardwood-floor retailer, has 27 million shares outstanding (total market value: $388 million), but only eight so-called shareholders of record. According to S&P Dow Jones Indices, more than one-fifth of the 1,500 largest companies in the U.S. have fewer than 300 official shareholders. Eight companies with market values of at least $1 billion each report having no more than 10 shareholders of record.
Such are the marvels of modern markets.
Your grandparents, perhaps even your parents, kept a sheaf of stock certificates in a safe-deposit box at the local bank as proof that they owned a certain number of shares in specific companies.
Grandma and Grandpa automatically got certificates, and their names were individually recorded on the companies’ ownership books.
But nowadays you automatically buy shares in electronic, not physical, form. Unless you ask your broker for a certificate to prove your ownership when you buy the shares, you won’t register on a company’s list of shareholders of record. Since brokers may charge $500 and up to issue a stock certificate, you’d be nuts to request one — and almost no one does anymore.
As a result, under Securities and Exchange Commission rules that conform to a 1934 federal law, companies don’t have to count every Joe and Jane Investor as a shareholder.
Instead, they need only list the institutions that represent Joe and Jane — such investing behemoths as BlackRock, Charles Schwab, Fidelity Investments, Morgan Stanley or Vanguard Group. Often, Depository Trust & Clearing Corp., an industry-owned organization that handles trades for brokers and asset managers, stands in for many big firms as shareholder of record.
Computer-graphics giant Nvidia Corp. has 534 million shares outstanding and a stock-market value of more than $25 billion. The company’s official count is 342 shareholders, but Nvidia estimates it has at least 200,000 in total, says spokesman Ken Brown.
The trend is accelerating. Twenty years ago, according to S&P Dow Jones Indices, the typical company among the largest 1,500 stocks had 3,342 shareholders of record. By the end of 2010, that was down to 2,689. At Dec. 31, 2015, the median number of official shareholders had shrunk to 1,969. Among all stocks tracked by S&P Dow Jones Indices, shareholders of record have shrunk to a median of 352 today from 1,626 two decades ago.
Under SEC rules, a company with fewer than 300 shareholders — or a bank with fewer than 1,200 — may choose to deregister with the federal securities regulator. The stock can still trade publicly, but the company is no longer required to file its financial statements and other disclosures with the SEC. No wonder investors have nicknamed deregistration “going dark.”
Deer Valley Corp. of Guin, Ala., a manufactured-home builder with a total stock-market value of $10 million, went dark on May 11.
“We were spending close to $600,000 a year to comply with the [SEC] rules, and that’s a lot of money for a small company like us,” says Steve Lawler, Deer Valley’s chief financial officer.
Deregistering, he says, “will certainly free up some of the time we were spending on compliance to focus on the business.”
On the other hand, being an outside shareholder in a company that goes dark will remind you why Justice Brandeis wrote that “sunlight is said to be the best of disinfectants.” Dark companies trade mainly in the “pink sheets” on the over-the-counter market, and their shares tend to dive when they go dark.
Dan Schum, an engineer in the San Diego area who invests in tiny stocks and blogs about them at NoNameStocks.com, says some dark companies post quarterly financial statements on their websites. Others produce only an annual statement. Some provide financial reports only to shareholders who ask; some don’t provide them at all.
Matthew Crouse, an investor in Salt Lake City who has also bought dark companies, recalls “begging” to get an annual report — and failing. “The lack of information just kills you,” he says, although returns can sometimes be attractive for investors willing to wait years for good news.
The SEC could narrow the going-dark loophole by raising the threshold for large companies, although that isn’t on the agency’s current agenda.
You can check how many shareholders of record a company has in its annual 10-K report in the “Market for Registrant’s Common Equity” section.
Normally, larger companies don’t go dark. But only relatively minor technicalities prevent a controversial or beleaguered firm from taking that step.
Not so long ago, the idea that U.S. companies would relocate to other countries to lower their taxes seemed farfetched. Then “inversions” became all the rage.
Investors can only hope going dark remains in the shadows, where it belongs.
Source: The Wall Street Journal