How a New SEC Ruling Could Impact Micro-Cap Investors

An upcoming SEC rule change could have a significant impact on liquidity of micro-cap “dark stocks.” What will that mean for investors?

SEC building

SEC rule changes are not something most investors think about, but an upcoming change could significantly affect “dark stocks” and present a liquidity problem for micro-cap investors.

There are different versions of dark stocks, but in short, a dark stock is one that doesn’t report its financials to the SEC or to

Some companies only share their financials with their shareholders, but many “dark companies” post their financials (which sometimes have been audited, sometimes they haven’t) for public consumption on their website.

In the past, brokers could provide price quotes for these types of stocks if the brokers could confirm that the company had made current information available (the financial information didn’t need to be filed with the SEC or with

Effective September 28, 2021, however, brokers will not be able to provide price quotes for dark companies anymore.

As a result, many brokers will not allow their clients to buy or sell dark stocks starting on September 28.

Here’s what Schwab has shared with its clients:

What Does That Mean for Dark Stocks?
It’s unclear what will happen with dark stocks after September 28.

Will liquidity 100% evaporate? Will another solution develop (capitalism usually finds a way)?

As you would expect many dark stocks are falling in anticipation of limited liquidity.

Check out TreeCon Resources (TCOR).


It is a tiny company ($9MM market cap) that is considered “dark” because it doesn’t report its financials to the SEC or to

But it does post its financials on its website, and through the first half of its fiscal year, it has generated $0.10 or $0.20 in EPS on an annualized basis.

At its current price, it’s trading at a price/annualized earnings multiple of 2.5x!

The problem is we don’t know if investors will ever be able to buy the stock again.

It’s cheap, but unless it’s sold or liquidity improves, it may stay dirt cheap for a long time.

This brings me to another micro-cap stock that is being impacted by this rule change.

This Micro-Cap Could Benefit from the New Rule
Liberated Syndication (LSYN) is a micro-cap company that is currently late on filing its financials. As a result, its liquidity will be impacted by the 15c2-11 rule change.

You can see this in Libsyn’s stock price:


But the good news with Libsyn is its management team is working to get current with its financials, and when it does investors will likely rush back into the stock.

First, let’s cover why Libsyn’s financials are delayed.

In March of this year, Libsyn filed an 8-K noting that it needed to restate its financials for prior years, disclosing that it didn’t properly collect local and regional sales taxes on sales.

In June, it filed another 8-K indicating that the net liability is expected to be $2.1MM in taxes and $650,000 in penalties.

While less than ideal, this penalty isn’t material given the company had $11MM of net cash on its balance sheet (last disclosed) and is very cash generative.

Eventually, Libsyn will restate its financials, which I believe will reveal a fast-growing business.

Libsyn’s business comprises podcast and website hosting. The podcast hosting business is in secular growth and the company itself is experiencing rapid growth.

Also, Libsyn recently announced and closed an acquisition of a podcast monetization software business called AdvertiseCast, which grew by 45% last year.

On a combined basis, Libsyn/AdvertiseCast are growing at 17.5%.

By my estimates, the company is trading at 3.0x 2020 revenue and 2.5x 2021 revenue. Simply put, this is way too cheap for a high-growth software company that is riding the secular growth of the podcast market.

Fast-growing secular winners can trade as high as 10x to 20x revenue. While I don’t know exactly what fair value is for Libsyn, I think it’s significant above where it trades now.

In terms of timing, I expect Libsyn to restate its financials by the end of 2021, which will enable all investors to own it.

*Full disclosure: I own LSYN shares.

Do you own any micro-cap stocks? Any potential dark stocks? Tell us about them in the comments below.


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