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Lectures and Articles

Articles By and About William Cate

The purpose of these articles and the lecture link is to show that I’m a recognized financial expert.

Lecture Link
2002 Lecture at the National University of Singapore: http://www.fba.nus.edu.sg/cet/forum.htm

I’ve lectured at scores of Conferences, Seminars and Workshops on topics related to taking companies public in the United States, global investing, investment scams and exporting products and services into North America. I began my lecture career as a college and university instructor in Missouri, Illinois and Florida.

Articles

This article was published over twenty years ago.
SAN FRANCISC0 BUSINESS JOURNAL
February 22, 1982

INVESTMENTS
Expert tells local investors of rip-off dangers abounding in gold-mining ventures

By Michelle Munz

It is more profitable to promote and sell a gold mine than it is to own and operate one, according to William Cate, a geological consultant and author of four books on the subject of mining and gold Investments.

Few business ventures are more risky than mining. But it is also one of the most alluring A sort of historic charm. The chance of striking a vein and "making it big," has a way of attracting investors. But rarely do mines turn a profit. More often than not, investment proposals, which may seem totally legitimate, are really rip-offs," said Cate.

Cate spoke at a recent gold investment seminar in San Francisco sponsored by the Co-Op Banking Group Companies. He outlined the measures potential investors can take to guard against being duped by unscrupulous mine owners and promoters, or those owners who legitimately believe they can make money even though, practically speaking, it is not possible.

"More money is made selling gold mines than buying gold mines." Cate said. For an investor it is a highly speculative venture, as the vast majority of mines are never profitable. But if the venture hits pay dirt, the rewards can be great, with returns of 50-to-1

It is a business that appeals to the gambling instincts of investors, and it's a business that has more than its share of unscrupulous promoters. Because of mining's risky nature, Cate advises that investment proposals be carefully scrutinized

"The first thing I do when I open the happy proposal," said Cate, "I look for tax shelters... In this way you can always get some portion of your money back. This is important because 95 percent of all mines don't produce."

There are basically two ways a gold mine investment can save an investor tax dollars. The first method is by deducting the development costs. But in order to qualify, the investor must be at risk and the IRS must view the financial backer as a joint tenant. Limited partners, as a result of IRS regulations passed in 1977, are not eligible for gold mining tax shelters.

The second way to lessen the tax bite is to hold any ore that is mined as inventory. In this way the inventory is non-taxable until it is sold. In order to qualify for this tax advantage, the IRS must consider the investor a mine operator.

But tax shelters cannot turn a bad investment into a good one, said Cate. "The belief that your investment capital would only be paid to the IRS," he said, "is only partially correct. Depending upon your tax bracket, you will lose a percentage of your mining investment. Anyone using a tax shelter should be aware of the fact that they have real dollars at risk and make every effort to ensure that there is a reasonable possible return on that investment."

It is advisable to have an accountant or attorney review these tax shelter provisions. Because of the high-risk nature of the mining business, shelters exist in order to encourage investors, but the laws relating to the shelters are complex and it is well worth your while to have a tax expert evaluate that portion of the proposal.

Once Cate finds the shelters to his liking, he looks for the payback provisions. He said he is suspicious of promoters who offer a portion of the net proceeds. Especially those willing to pay investors 100 percent of the net.

With 95 percent of all mines never reaching profitability, said Cate, it is more than likely there will "never be a net." He prefers deals where the investor takes a cut of the gross profits. The ideal proposal, Cate said, allows investors 60 percent of the gross, the contractors working the mine 40 percent.

In any mining operation, he continued, the major expense should be the purchase of equipment, accounting for "at least one-half and usually two-thirds" of the budget One way investors can protect themselves against losses is to retain ownership of the equipment. In case the operation fails, selling off the equipment will recoup a portion of the investment.

Cate suggested buying used equipment that has a resale value. Consultants, who specialize in setting up mining operations, can assist investors who are not experienced in the field. The key to a successful mining venture is to spend the least amount of money possible.

In the beginning, he said, salaries and administrative costs must be kept to a minimum. This is especially true in the initial stages before the mine has produced a product.

"In small mining operations," Cate suggested "initially concentrate on developing your low-cost high-grade ore. Use the profits to do your exploration work, prove up reserves and build your mill." And he adamantly cautions against building a mill until enough ore has been stockpiled "to pay the cost of mill construction "


It is not necessary, said Cate, to spend millions of dollars to make millions of dollars -
In order to ensure funds are allocated correctly and to protect against mismanagement of the mine, Cate said, it is advisable to employ an independent controller, such as a bank or savings and loan. If the whole thing is true, which I 'm not inclined to believe, I ask How am I protected?

Once administrative and financial matters are ironed out, an investor's next and most important step is to determine the likelihood the mine will produce.

Cate prescribes a healthy amount of skepticism in assessing a mine's potential. "There's no such thing as an assay report that's absolutely believable; there's no such thing as a geological report that is absolutely believable. Everything is at best, a guess."

A favorable assay report does not always translate into a profitable mine, he said Structural factors location and a host of other limitations may make the cost of extraction prohibitive.

In addition, he cautioned against relying on the reports preferred by mine promoters. Consultants and geologists hired by the promoters because of the nature of their relationship, have a vested interest in coming up with a favorable report And geology is not, as many people believe, an exact science, said Cate

Assay reports are based on samples taken from the mine, and there's no guarantee the samples are representative of the entire composition of the mine and further, even if the assay is a legitimate indication of the overall distribution of the mine, recovery costs may preclude a profitable operation

In assessing geological reports, said Cate, "You can find out your basic answers to questions by going to the library and spending two hours." A wealth of information exists on North American mines Even an investor, unsophisticated in mining, can profit from this basic step of research in a library," he said

Rarely are discoveries of new productive mines made, a limited number of mine sites exist and over the years most have been staked "The best mines," said Cate, "are in the courts."

By comparing the geological report to previous reports and data on the same mine, one can begin to sort out fact from fancy. If no reports can be found on the particular mine in question, then those reports on mines in the surrounding area are a good indicator as to the veracity of the claims made by the mine promoter. If mines in the vicinity were productive, it becomes likelier that the mine being researched will pan out.

In the Bay Area, Cate cited two libraries that house useful mining information the California Division of Mines and Geology Library at the Ferry Building in San Francisco and the University of California at Berkeley's Bancroft Library.

The final step in the investigation process is an examination of the mine site. At this stage, as well as at the point of library research, geological consultants can be helpful, said Cate. But he cautions that geologists may elect to write a report that favors the project, even when employed by the investor. The reason, said Cate, is that the investor may be encouraged to use the geologist's services, often at inflated rates, to develop a property that is not economic."

"Despite the pitfalls involved in backing a mining operation," Cate said, "there are numerous excellent mining investment opportunities, and it is simply a function of separating probability from the impossible and then designing an investment proposal that assures you of a just return for your speculative capital."

The three most basic questions that must be answered before entering into such a speculative venture are:
1. Is there something actually there to mine?
2. Is it economically feasible to extract'?
3. Are the administrative and financing components of the proposal designed so that the investor will get an optimal return on the investment?

"There's no such thing as an investment sure thing in mining," he said.

HERE ARE THREE 1998 ARTICLES BY WILLIAM CATE ABOUT THE UNITED STATES STOCK MARKETS:

The Bull & Bear Financial Newspaper
July 1998

The Good, the Bad and the Ugly
By William Cate

The sixty-five year effort of the U.S. Securities and Exchange Commission (SEC) hasn't reduced stock fraud. In 1932, over 98% of public (OC) companies failed. In 1998, over 98% of the OTC companies will fail.

SEC enforcement doesn't benefit the small capital investor. The SEC's problem is a mixture of congressional ignorance, self-serving policies, legal reality, and emphasis on form over function and inappropriate goals. The result is a brew of good, bad and terrible regulations and policies.

Full Disclosure is an excellent policy. Too often, it's lost in a morass of legal boilerplate. Besides timely disclosure of negative corporate events, the company should list these negative events in their annual Form 10K and Annual Report to Shareholders.

Due Diligence is a reasonable policy. Filing a form doesn't mean that the responsible party knows anything about the public company. The basis to Due Diligence should be reliable third party information about the industry, the company and the principals. The responsible party should collect this data. It shouldn't be supplied by the public company.

It's a sound policy to use the Courts to discourage stock swindlers. Relying upon criminal law hasn't worked. Criminal actions require a level of proof "beyond a reasonable doubt." Most jurors can't balance their checkbook. They don't understand the stock scam. They don't convict the culprits. Recognizing the conviction problem, the SEC ignores 90% of the stock scams in the OTC Market. The swindlers know the SEC policy and play the odds.

The SEC should follow the lead of the Federal Trade Commission. The SEC should represent the public shareholders. Court actions should be Class Action Civil Lawsuits against everyone who profited from the swindle. Civil lawsuits are easier to win. The public shareholders profit. Consistent use of a civil lawsuit policy would make stock scams unprofitable.

Keeping insider stock from the OTC Market is essential to protecting public shareholders. It's easy to beat the time-hold restrictions on Reg S and Rule 144 shares. Requiring insiders to keep their shares until the company becomes financially viable would reduce the OTC failure rate. It would reduce the percentage of stock swindles. If the swindlers can't sell their shares before the company succeeds, they won't take phony companies public.

Issuing Treasury stock dilutes the value of shares in circulation. It doesn't matter that the insider may hold the Treasury shares for one year. If acquired assets don't offset the issued shares, the share price must eventually collapse. A Reg S offering at a penny per share when the stock trades over $3.00/share is a formula for disaster. The discount on Treasury stock should never exceed the underwriters' discount on an IPO.

A Canadian Provincial Securities Law policy that the SEC should adopt involves warrants. In the States, the usual exercise price of warrants is below the share price. The warrant discount is based upon the date of issue of the warrants. The SEC expects the mandatory one-year holding period to limit abuse. In Canada, warrants must be sold at an exercise price above the share price. The higher warrant exercise price is based upon the share price as of the date of issue of the warrants. I believe the Canadians should widen the warrant spread from C$0.05 to one dollar. However, the high warrant price policy is an excellent idea.

The Canadian policy works to benefit existing public shareholders. The public company must move up their share price to get the warrants exercised. Public shareholders can sell into the upward move. If the spread were US1.00, public shareholders would potentially benefit whenever the company attempted a warrant financing.

Regulators usually develop an incestuous relationship with the industry they regulate. The original mandate is to protect the public. Over time, the mandate becomes protect the interest of the industry. The SEC applies more lenient policies to major brokerage firms. It allows some brokerage firms to ignore the Law. It defends the brokerage industry from outside and foreign incursions. These policies aren't always in your best interest.

Brokerage firms make most of their money in two ways. They underwrite Initial Public Offerings (IPOs). They sell stocks short. The short sellers are unregulated. Unlimited short selling destroys public companies. The public loses because the share price collapses and the company is delisted. The reason that short selling is so profitable is that over 98% of OTC companies fail. If you are certain of being right over 98% of the time, how can you lose money?

You can confirm the extent of the short selling problem by reviewing the audited financial statements of brokerage firms. Every publicly traded brokerage firm must file quarterly financial statements with the SEC.

One brokerage firm, often a defendant in short selling lawsuits, has a $30,000,000,000 declared short position. The question is what is their "undeclared" (this won't appear on their financial statement) short position. It could be zero. They could follow the Industry maxim and have 90% of their short sales as "undeclared" short positions. The size of their short position beyond $30 billion doesn't matter. Their assets are about $600 million. Their financial statements don't give a list of shorted stocks. You can't be certain that they short U.S. OTC. Thus, the brokerage firm could sell short stocks trading in Africa, South America, or Asia. However, I'd bet they primarily sell short American stocks.

The public companies victimized by unregulated short selling have only one defense. If they can get enough of their shareholders to request delivery of their share certificates, the public company can force the short sellers to cover (buy) shares to deliver to the shareholders requesting their stock certificates. Breaking the short sellers’ stranglehold on the stock benefits the public shareholders. It forces the short sellers to cover at progressively higher share prices. The public has the opportunity to sell their stock at a profit. The other side to this public profit is that the short selling brokerage firms risk bankruptcy. Should enough public companies force the short sellers to cover, the short selling brokerage firms must fail. Barings' Bank had this problem in Japan. It went under. The SEC doesn't want to see major brokerage firms follow in the Barings tradition.

The SEC wants to end the issuance of stock certificates. This is an ugly proposal. The beneficiaries would be the short selling brokerage firms. The losers would be the public. The SEC stock certificate policy is similar to New York City's gun control policy. Every criminal has a weapon, often an assault weapon. It's illegal for the public to own a gun. Until New York police can regulate the criminals, honest citizens live dangerously in New York.

In the same way, until the SEC effectively regulates the short sellers, it's unwise to disarm the public companies. The stock certificate defense is like using BB guns against assault rifles. It may not be much protection, but it's better than nothing.

Power, without reflection, equals terror. A terrorized goose doesn't lay golden eggs. Since 1981, there's been a 70% decline in brokerage firms involved with the OTC Market. The percentage of honest brokers hasn't changed. The percentage of sound OTC companies hasn't changed. SEC regulation hasn't created a better, safer or more honest marketplace. If the SEC doesn't reflect on their policies and goals, they'll kill the OTC goose. As the SEC kills the OTC goose, they may wipe out your bank account.

Investor Alert
September 1998
Undeclared Short Selling
By William Cate

Some stock you buy doesn't exist. This nonexistent stock wasn't borrowed. Market professionals created it. The financial community calls the practice an Undeclared Short Sale. Once market professionals add this nonexistent stock to a company's float, it endures until the company's shares stop trading. The additional nonexistent stock hurts shareholders.

It makes it difficult for investors to profit from their risk capital speculations. The sellers of the nonexistent stock make the profit. The practice hurts the public company. It adds massive costs to maintaining a market in their stock. It reduces the company's business options. It ensures the company's eventual failure.

Any financial textbook explains the basis of short selling as borrowed stock. A short seller loans 50% or more of the value of the stock to his or her broker. We call this money the margin or margin account. The margin protects the broker against any increase in the share price. The broker borrows the stock from the Depository Trust Company. The broker sells the stock and adds the money to the client's margin account. Later, the client buys stock (covers) to replace this borrowed stock. The difference between the price the client sold the borrowed stock and the price the client paid to replace the borrowed stock (covered) is the profit or loss in the transaction. Market professionals call the textbook explanation a Declared Short Sale.

The Short Interest report in financial publications reflects Declared Short Selling. Short Interest is rarely a near term threat to the company's existence. Small capital public investors seldom participate in Declared Short Selling. Most declared short players are institutional money managers and fringe group markets professionals.

Declared short positions risk being squeezed if the company can double its share price, the short sellers must double their margins. At some point in an upward moving share price, the short sellers may elect to buy (cover) the stock instead of adding to their margins. This adds to the upward movement of the share price. Public company principals dream of squeezing the declared short seller. It doesn't happen often. Forcing the declared short sellers to cover their positions can add a couple of dollars to an upward moving share price.

Undeclared short sellers don't borrow stock. They don't margin the sale of their short position. They can't be squeezed. They bet on the company failing. In US OTC stocks, they'll be right. The odds of failure are better than 98-to-2. If the company doesn't die a natural death, they'll help it into the grave. I'm not saying that every risk capital stock has an undeclared short position. However, it’s a very common practice. Stock promotion favors the development of a large undeclared short position in any stock.

There are many ways a public company can confirm an undeclared short position in their stock. One method is to use the response to the company's annual general meeting. The company can add the issued stock (IS) and the short interest (SI). The sum is the available stock in the company's market. Now add the known shareholder positions (KS) and the street stock proxies (SP). If the (KS + SP) sum is greater than the (IS + SI) sum, you have an undeclared short position in your stock. Most street stockowners of risk capital stock don't submit proxies. You can estimate the size of the undeclared short position by multiplying the stock proxies by ten. This assumes 10% of the street owners submitted proxies. The 10% estimate is usually higher. When many public companies do this comparison, they learn that they have a 3-7 million share undeclared short position in their stock.

An interesting byproduct of Equity Reform movements has been the limiting of access to undeclared short selling. Examples include: The post World War II reforms in the United States, the 1964 reform in Toronto and the 1985 reform in Vancouver. Limiting the access to undeclared short selling hasn't limited the practice. However, it excludes most retail brokers, newsletter editors, money managers and anyone on the fringes of the internal workings of the Market. Undeclared short selling networks include a few powerful market insiders, a couple of politicians or bureaucrats, and a few financial powerhouses. The credo of undeclared short sellers is simple: "You can never sell too much stock."

How much money will undeclared short sellers make selling nonexistent stock? Different groups have different trading principles. A conservation group limits targets to risk capital stock promotions. Their average sale price for nonexistent shares will be around $2.00. They'll limit the nonexistent stock sold. They may sell a half million shares into a stock promotion. This gives them a gross profit of a million dollars per company. Let's assume 50% of the North American risk capital companies develop a small-undeclared short position every year. This means undeclared short sellers make over a billion dollars annually. It's "big business."

How do undeclared short sellers create nonexistent shares? Some of it develops within the trading system. A clearinghouse doesn't execute an order, but sends the broker a confirmation. Most nonexistent stock comes from offshore tax havens. It's impossible to trace the beneficial owner. Furthermore, the sale is tax-free for the seller. The nonexistent stock trades several times and comes to rest within the control of the undeclared short selling group. Control means the undeclared short sellers believe they have enough power to force the public company to issue more stock, if necessary.

Undeclared Short Selling works because the trading system lacks closure. The monthly brokerage house account statement isn't tied to specific shares issued by the public company. The client account statement is a claim on shares. It doesn't represent ownership of specific share certificates. You get from your broker an open-ended option on stock you buy. You don't own the stock. Shareholders rarely exercise their option on the stock they buy. The structure is similar to the Government's issuance of dollars earlier in this century. Dollars represented options on the gold and silver held by the Government. Few dollar owners exercised their option on the silver or gold the dollar represented. The Government issued more dollars. A multi-billion dollar undeclared short position evolved. Eventually, the dollar became an option on nothing.

You can't squeeze the undeclared short seller. They don't have their money at risk. The short trap principle is simple. A successful short trap would take a twenty-five-cent-stock to between thirty and fifty dollars within a few weeks. The average shareholder would make about thirty thousand dollars on what had been a bad investment. The company's principals would split between ten and fifteen million dollars.

So far it's proven impossible to catch the undeclared short sellers. There are a few instances where a short trap appeared to be a threat. The undeclared short sellers forced the company to issue discounted stock, before the share price moved up. The newly issued discounted stock converted nonexistent stock into trading shares. The short trap evaporated. The share price collapsed.

Complaints to regulatory agencies haven't stopped the practice. Lawsuits involving this practice are informative but never effective. The solution to the undeclared short selling problem isn't in the Courts. If many victims of undeclared short selling don't understand the crime, how can you expect a jury to find anyone guilty?

A new short trap strategy will be tested, later this year. The trap will be sprung in 1996. The multi-billion-dollar profit potential explains the interest in solving the problem. Currently, there's a search for companies with one million+ share undeclared short position. I will happily supply principals of public companies with free information on this program. The aim is to set the trap at the Company's Annual General Meeting in December 1995.

A successful short trap strategy benefits almost everyone. Shareholders make money. The public company has a stronger share price. The stronger share price allows the company to use its stock to build its asset base. The insiders get rich. Retail stockbrokers keep their clients. Newsletter editors keep their subscribers. Investor relations firms prosper. Regulators get fewer vague complaints about collapsed share prices from the public.

Reducing undeclared short selling improves the quality of new listings. The present system justifies unworkable business plans. It puts the emphasis on stock promotion, not business performance. The nonexistent stock destroys the company's share price. It ensures the company's failure. The usual response to nonexistent stock is that the insiders dump their stock into their stock promotions. SEC Rule 144, the two-year hold on insider stock, doesn't protect the public. It often helps the undeclared short sellers. The present system allows the public and public companies to be consistent losers.

Nothing is risk free. The outcome of any new financial strategy is uncertain. Public companies and their shareholders can't win by allowing the undeclared short sellers to sell nonexistent stock. They win by making money and creating a strong public company. Their best bet is to trap the undeclared short sellers.

Editor's Note: Mr. Cate is a consultant to many international business and financial firms. He helps companies go public in North American. He imports and distributes his clients’ products and services into the American Market

Bull & Bear Financial [http://www.thebullandbear.com/articles/article-toc98.html]

Scorboard Revisited
By William Cate

My May 1998 SCORBOARD article in the Bull & Bear suggested that the National Association of Securities Dealers (NASD) illegally trades "Exempt Securities" (Microcap stocks) on the Over-the-Counter Bulletin Board (OTCBB). Market Maker short selling of these Microcap stocks ensured that public investors consistently lost their money.

In July, the NASD Board voted to delist approximately 3,400 Microcap companies from the OTCBB. The NASD decision is File Number: SR-NASD-98-512 6530/6540. This NASD Board decision is subject to review by the SEC. After the SEC review, the Microcaps are expected to have six months to become reporting companies or be delisted.

The SEC regulates the NASD. The SEC is responsible for the public trading of shares in the United States. Based upon recent SEC Cease & Desist orders against Internet Stock Exchanges, I believe that the OTCBB Microcap trading violates Section 5 of the 1933 Act. The SEC response to the NASD Microcap Resolution should have been clear. Delist the "Exempt Securities." Your brokers violated the Law by trading in these shares. They must refund money to clients who lost from "Exempt Securities" trades on the OTCBB.

The SEC sees the "Exempt Securities" issue in a different light. They've reversed their position on Microcap regulation. For years, the SEC held that their mandate didn't include the regulation of "Exempt Securities." Today, the SEC goal appears to be to hold the Microcap companies responsible for illegally promoting their stock on the OTCBB. This is an example of a battleship sinking rowboats.

In September, the SEC began asking some Microcap OTCBB companies about their stock promotion efforts. The companies can't answer this question without conceding that they violated Sec 5 of the 1933 Act. It appears that the SEC is lining up Christians to throw them to the lions. The Microcap OTCBB delisting will cost public investors several billion dollars. By charging some Microcaps with fraud, the SEC will direct public outrage against the Microcap companies and not against the Establishment.

In October, the SEC announced filing charges against 44 Internet stock promotion firms. These firms primarily hyped Microcap stocks trading the OTCBB. The SEC action hasn't reduced the Net hype. It'll move it offshore. It does give the SEC their cover story. The public lost money because dishonest Microcap companies used crooked promoters to hype their stock. As with any good cover story, it may be true in some cases. But, it doesn't address the NASD Microcap listing policy, the short selling problem, nor the failure of the SEC to protect the public until the press raised the Exempt Security issue.

If you're an investor don't buy OTCBB Microcap stocks. You're certain to lose your money. The NASD doesn't identify these companies, so rely on your stockbroker or the SEC's EDGAR database to protect your bank account.

If you bought OTCBB Microcap stocks, don't join the growing trend of suing the Microcap Company. You'll get nothing but a bill for legal services. Upon your attorney's advice, rely on Section 5 of the 1933 Act and seek compensation from the NASD.
If you're an OTCBB Microcap company, develop your delisting response strategy before the NASD acts. You have three choices.

1. You can do nothing. In 1999, your Microcap Company's stock will be delisted from the OTCBB. If your shareholders don't complain to the SEC nor file a lawsuit, you've solved your problem. If any shareholder files a SEC complaint or sues, you could spend several hundred thousand dollars on legal fees. You'll have to explain your stock promotion and justify your decision to allow the NASD to delist your company. Filing for bankruptcy won't relieve you of replying to a SEC investigation.

2. You could list your company's stock on another exchange. There's at least one foreign stock exchange apparently considering taking the Microcap listings.

3. Your company could become a reporting company. If this is your decision, act now, not when you get your OTCBB letter. The delisting letters may create a rush to file with the SEC.
You have a choice of SEC filing strategies, I advise my clients to file so that the company gets a financing and can list on a European Stock Exchange. It's the simplest, fastest, and cheapest alternative.

In 1933, the goal of Congress was to create a Securities and Exchange Commission that would protect the public from stock fraud while enhancing capital formation for business. If Congress's goal were only to protect the public, they would have outlawed stock markets.

The SEC doesn't know how to achieve its congressional mandate. Money Magazine (1/1/98) points out that stock fraud grew by 300% in the past decade. This threefold increase in stock fraud occurred after the SEC persuaded Congress to pass the Penny Stock Act.

Since 1933, stock fraud has grown by over one hundred-fold. Recently, the SEC appeared to believe that they could save the public by outlawing the OTC Market. The successful opposition to this proposal was lead by National Quotes. They publish the Pink Sheets. Meanwhile, the SEC drives away honest entrepreneurs from becoming reporting companies by making the filing process too costly.

Politicians react to the SEC's destruction of capital markets by enacting laws that encourage businesses to seek equity investment beyond SEC control. SCOR is an example. The problem is the crooks find a way to use the Government's desire to allow capital formation as a springboard for stock fraud. The OTCBB Microcap Scandal is the result. This regulatory failure has been cyclic for sixty years. After the Microcap Scandal, there will be Government pressure to encourage business capital formation. The next stock fraud cycle will follow.

The SEC can balance the need for capital formation against the necessity to protect the public investor. Since the OTC Market exists, it should be used to solve their dilemma. The secret is to make it unprofitable for the crooks to take companies public or manipulate the Market.

NASD members must stop selling stocks short. A brokerage firm with a short position forty-times their asset isn’t protecting the public investors. It's fleecing them. Stockbrokers must be on the same side of trades as their public clients. The primary reason that the OTCBB listed the Microcaps was that they are an easy short selling target. Recently, the Hong Kong Government removed stockbrokers as short sellers in their Market. Their Stock Index rose 25% in one week. The Chinese Government intends to pass a Law to ensure that professional short selling ends in Hong Kong.

Delaying the sale of insider stock for a year doesn't work. It's traded offshore in Europe and the Caribbean at a 70% discount. It hits the American Market like a tidal wave in 366 days. It takes five years for a startup company to succeed. The insider stock shouldn't be issued as share certificates, until the company shows an audited profit. It should enter the Market as a fixed formula of shares issued against the company's pretax profit. This policy would force the insiders to make the company succeed, before they dump stock on the public.

Public companies must raise money to grow. Regulatory costs make it uneconomic to do a public secondary financing. Management responds by doing a 60% discounted Regulation S offering in Europe. This Reg. S stock hits the American Market a year later.

* The company's public shareholders lose their investment.

* The share price collapse often leads to the company's failure.

The SEC should require that public companies sell their Treasury stock at a share price higher than the company's current trading price. The Treasury stock should be sold without trading restrictions. The higher-price share policy would reduce stock dilution and ensure against dumping in the OTC Market. The European Reg. S Market would become an American Warrant Market.

Clear language, reduced filing forms, and electronic filings are positive small steps in the right direction. However, the SEC must review its regulatory strategy if it expects to fulfill its congressional mandate. The SEC has missed the mark for sixty years. How long should American taxpayers be asked to pay $3 billion a year for SEC failure?