Penny Stocks Holding Their Heads Higher

For many years, Pink Sheets provided information on very small-cap companies that were too small to list on other exchanges, or as it was better known for, companies that failed to meet an SEC or exchange-listing qualification because of bankruptcy or some other corporate turmoil.

Such companies still make up most of the Pink Sheets universe. Some will evolve, and some will inevitably dry up and blow away.

But there's a growing list of more legitimate companies wanting to trade publicly but not wanting to deal with the expense and hassle of complying with certain rules, Sarbanes-Oxley in particular. For these companies and others, Pink Sheets is now working to become a more recognized and more strongly branded niche player. More sophisticated investors may want to keep track of these developments.

• Foreign ADR "5% rule." ADRs, or American depositary receipts, represent shares in companies headquartered in other countries. For some 140 companies trading less than 5% of their volume in U.S. markets, the SEC recently ruled that they could delist from major exchanges and trade in the U.S. without expensive compliance with Sarbanes-Oxley and certain other regulations.

  Some of these companies are large and well known -- Germany's Bayer and BASF, Japan's Makita and the U.K.'s InterContinental Hotels Group. I don't recommend direct foreign investing for everyone, but Pink Sheets offers a good way to pick up major internationals operating under different accounting and financial regulations that simply don't wish to spend the money to comply.

  There are hundreds of other international company ADRs already on Pink Sheets, including well known names like Sweden's Electrolux (ELUXY Quote - Cramer on ELUXY - Stock Picks) and Germany's Adidas (ADDYY Quote - Cramer on ADDYY - Stock Picks).

• Premium Tier. Recognizing the need to legitimize and brand the best segments of the market they operate in (a la Nasdaq), Pink Sheets is rolling out a new market tier known as the OTCQX, with listing requirements similar but not exactly matching major exchange requirements.

  OTCQX includes four subtiers: PremierQX, PrimeQX, International PremierQX and International PrimeQX. Well known names residing here include U.K.-headquartered food processor Tate & Lyle (TATYY Quote - Cramer on TATYY - Stock Picks).

• Disclosure Categorization. Researching small and international securities is by no means easy, although Pink Sheets does provide some modest tools. But starting Aug. 1, it has also implemented a four-tier symbol system for non-OTCQX securities in the interest of legitimacy and helping investors find the better listings.

  "Pink checkmark," "yield sign," "stop sign," and "skull & crossbones" are assigned by Pink Sheets to each security, representing how closely a company has met certain information and disclosure requirements.

I'm not suggesting Pink Sheets will become another Nasdaq any time soon, but it is emerging as an important niche player, particularly as Nasdaq gets bigger and investing goes more global. More intrepid investors might want to don some rose-colored glasses to take a peek.

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