- Richard Ketchum, CEOFinancial Industry Regulatory Authority (FINRA)
Improve FINRA's Process for Relisting After SEC Suspension
The cannabis industry is in the beginning stages of a massive transformation, with almost half the states now having adopted a medical marijuana program and two states having implemented programs for legal adult use. Businesses in the industry have a difficult time accessing capital due to cannabis remaining federally illegal and have turned to the stock market to finance growth. A recent crackdown by the SEC and FINRA addresses some important issues, but a flaw in the process has created considerable risk for investors and could slow the expansion of the industry, potentially reducing access by medical patients. FINRA can easily address the issue by changing the process for companies to relist should they be suspended from trading by the SEC.
- Financial Industry Regulatory Authority (FINRA)
Richard Ketchum, CEO
As investors seeking to capitalize on the rapidly evolving way our society thinks about cannabis, we share your concern about potential market manipulation and applaud the efforts of FINRA and the SEC to protect investors. However, the current requirements for relisting following an SEC suspension are severely flawed. Companies are automatically relegated to the Grey Market during a suspension, an action that typically results in an 80% or more reduction in price as the stocks lose liquidity due to the lack of quotation and market-makers. The current process for exiting the Grey Sheets lacks transparency and can unfairly cripple a company and its investors.
By its own admission, FINRA does not communicate with companies that have been suspended by the SEC regarding their efforts to regain quotation. Nor does it commit to assessing a company's ability to relist within a specific time-frame. Investors are also left without information following a suspension. Additionally, the current process requires the company to find a market maker willing to submit a Form 211, with the applicant "representing that it has satisfied all applicable requirements of Securities and Exchange Commission (SEC) Rule 15c2-11 and the filing and information requirements of FINRA Rule 6432." This process is challenging because the market maker who submits the Form 211 bears all the risk, while other market makers have the ability to free-ride if FINRA approves the relisting. A greater challenge is that FINRA's process doesn't require a timely response, which can result in the stock of a company with no outstanding regulatory issues trading on the Grey Sheets for an extended period.
We request that FINRA work with the SEC to provide better communication with market participants during the period following an SEC-ordered suspension and prior to the resumption of trading. This will inform investors better about the company involved in the suspension and alert the public to bad practices employed by public companies. If the SEC and FINRA determine that there is no longer an issue, FINRA's process should allow a suspended company to resume trading without the stock being relegated to the Grey Market. Additionally, if a company is required to trade on the Grey Market after a suspension is lifted, there should be a process by which multiple market-makers can share in the risk assumed by submitting a Form 211. Finally, FINRA's process for relisting should require a timely response to the market maker's application.
Please consider these recommendations to address these shortcomings in the current process of SEC-imposed trading suspensions, as the present system can unfairly punish companies and their investors and can undermine investor confidence in a sector that has limited access to capital.
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