$$$$$$$$ New Sec Regulation for Over-the-Counter (OTC) securities *** This is very relevant for those holding international stocks - US Markets
I have got this email from my broker - Etrade tonight and it seems very concerning to me - I just want to share here and also understand if I understood this correctly. My take is that we will almost not be able to trade these securities as no new buys will be allowed by my broker at least as per this message. I have BABA, TME and TCEHY - for me, there is no impact yet as TCEHY is pink but they disclose information. Please check your holdings and take action accordingly.
New regulations will affect your ability to buy and sell “Pink No Information,” “Grey Market,” and “Expert Market” Over-the-Counter (OTC) securities, including at E*TRADE.
On September 28, 2021, new amendments to Rule 15c2-11 under the Securities Exchange Act of 1934 take effect that will impact the market for certain OTC securities classified as Pink No Information, Grey Market, and Expert Market OTC securities (collectively, “Impacted OTC Securities”). These rule changes prohibit broker-dealers, like E*TRADE, from publishing bid/ask quotations of companies that fail to publicly report and keep current financial and other company information. The amendments also restrict the ability of retail investors to open new positions in Impacted OTC Securities.
What do these rule changes mean for you
After Friday, August 27, 2021, E*TRADE customers will no longer be able to buy Impacted OTC Securities through E*TRADE. E*TRADE will restrict new buy orders in Impacted OTC Securities prior to the regulatory enforcement date, as it may become more difficult to liquidate such securities after the compliance deadline. While E*TRADE will accept closing orders to liquidate positions in these securities after the amendment goes into effect on September 28, 2021, it may be more difficult to sell these securities, as quoting and market liquidity may be very limited. The following restrictions will apply to any closing order for Impacted OTC Securities:
You must not be an Affiliate, Insider, or Control Person of the company
Only limit orders will be accepted
Quotes for the security will not be available
Other restrictions related to the purchase and sale of these securities may also apply.
Please visit OTC Markets Group’s website to see if any OTC securities you hold are currently categorized as a Pink No Information, Grey Market or Expert Market security.?1;
We can't have international stocks on strawman right now, but I thought opening a forum to share ideas might be of use......
The first idea I would like to share is Upstart (NASDAQ: UPST).
Upstarts Mission: "Our mission is to enable effortless credit based on true risk. We are a leading artificial intelligence (AI) lending platform designed to improve access to affordable credit while reducing the risk and costs of lending for our bank partners. Our platform uses sophisticated machine learning models to more accurately identify risk and approve more applicants than traditional, credit-score based lending models."
What Upstart is not: They are not a lender per se, and have negligible credit risk - all credit asets are sold onto banks / corporate bond holder, or is funded directly via partnerships.
Value proposition: They reduce default losses for banks and creditors, and improve access to competitive lending rates and a streamlined lending process to borrowers.
Moat: Unique AI driven platform that assesses creidt riks better than tradiitonal means, and it gets better with every loan processed. It is difficult for banks to establish a similar product, and are now years behind in capability. It is just cheaper and easier for them to partner with Upstart.
Analysis from credit agencies show Upstart approved loans have lower default rates, despite having generally lower FICO average scores (legacy credit scores), and consumers rave about the loan application process.
Latest results
Q2 2021 Revenue: $194 Million, up 1018% on pcp, and 60% on Q1 2021 (this is not a type 'O' )
Application conversion rate of 24%, up from 9% on pcp (AI learning improvements shining through).
GAAP Income of $37 M (yes in is profitable).
Upstart platform just covers unsecured lending presently, and has been growing despite headlinds casued by stimulous money.
Upstart has established an auto lending service (Prodigy). It has processed 5000 loans to train the AI, and is now established in 47 US states. It is rapidly signing up banks, the new business will begin to contribute to proftis form FY2022. Auto lending market is 8x the unsecured lending market.
Upstart founders are very ambitious and wish to bring their platform to the world and change the way credit risk is priced.
RISKS:
1) The prospects of Upstart are tied to the market cycle, and it is yet to be truly tested in a normal, post-pandemic recession....the one where banks are allowed to fail.
2) Lender concentration - They have one large lending relationship, which generates a large proprtion of revenue. But this is declining - very rapidly.
3) Sale of credit. Creditors may be reluctant to take on further credit due to economic conditions / increasing defaults. If they do, this will hinder Upstarts revenue growth.
4) Competiton. Competitors, with significant resources, may enter the market and develop a compating platform. It is feasible, given the proftability of the bsuienss model, and the enormous TAM opportunity.