MMTLP Issues Force FINRA To “Examine” Trading Halt… Again
On March 16, 2023, the Financial Industry Regulatory Authority (FINRA) released responses to frequently asked questions concerning the MMTLP corporate action and trading halt that occurred on the same date. In this corporate action, the issuer decided to cancel MMTLP shares and distribute shares of Next Bridge Hydrocarbons to the investors holding MMTLP shares.
But it did not stop there. FINRA said it has been receiving numerous inquiries about the circumstances surrounding these events, with a particular focus on concerns related to short selling in MMTLP and the notion of “counterfeit shares.” Although the term “counterfeit shares” lacks clarity, it has been used in social media conversations when discussing “naked” short selling and failures-to-deliver (FTDs).
The corporate action
In June 2021, the merger between Torchlight Energy Resources and Metamaterial Inc. formed Meta Materials. While the common stock of Meta Materials was listed on Nasdaq, the Series A Preferred Shares were not listed and later began trading on the OTC market under the symbol MMTLP.
On July 15, 2022, Meta Materials filed a registration statement with the Securities and Exchange Commission (SEC) to register the issuance of common stock for Next Bridge Hydrocarbons, a subsidiary. As part of this action, Meta Materials would distribute one share of Next Bridge common stock for each MMTLP share held and cancel the Series A Preferred Shares. The registration statement for Next Bridge shares became effective on November 18, 2022.
On November 23, 2022, Meta Materials announced that MMTLP shareholders as of December 12, 2022, would receive one share of Next Bridge common stock for each MMTLP share held. This distribution took place on December 14, 2022, alongside the cancellation of MMTLP shares. The Next Bridge shares received in the distribution were not eligible for electronic transfer through DTC or other clearing corporations.
FINRA was notified of this corporate action as required by federal law, and they issued a public notice on their website on December 6 and 8, 2022, stating that Next Bridge shares would be distributed to MMTLP shareholders with settled positions as of December 12, 2022. Purchasers after December 8, 2022, were not entitled to receive Next Bridge shares.
Additionally, FINRA halted trading in MMTLP on December 9, 2022, due to concerns related to investor protection and public interest.
Right number of Next Bridge shares
As the MMTLP issuers continue to hound FINRA with their questions, the regulatory body decided to issue a supplemental FAQ on Monday to provide further information to address these questions and concerns.
On the matter of identifying if the right number of Next Bridge shares were distributed in connection with the corporate action, FINRA clarified that it does not play a role in distributing securities as part of a corporate action, and it does not regulate issuers or transfer agents. However, publicly available information from Next Bridge regarding the corporate action states that they distributed 165,472,241 of their common stock shares to MMTLP shareholders on a one-for-one basis. This distribution was managed through their transfer agent, American Stock Transfer & Trust Company, LLC (AST), which handled the distribution either directly to MMTLP shareholders registered with AST or to shareholders’ bank, broker, or nominee representatives.
“Thus, the issuer has represented that 165,472,241 Next Bridge shares were distributed in connection with the Next Bridge / MMTLP corporate action—the same number of shares anticipated to be distributed to MMTLP shareholders per the prospectus filed with the SEC,” said FINRA.
The information from both Meta Materials and Next Bridge, before and after the corporate action, indicates that the number of MMTLP shares expected to be outstanding matches the number of Next Bridge shares distributed to MMTLP shareholders on a one-for-one basis. FINRA reportedly has not found any information to the contrary.
Asking FINRA to “audit”
FINRA said it has received queries regarding conducting a “share count audit” for Next Bridge/MMTLP shares. However, the regulatory body asserted that the term “share count audit” is vague, and its usage in social media may refer to a review to determine the presence of “counterfeit shares” resulting from “naked” short selling and FTDs in MMTLP.
Unfortunately, FINRA lacks the jurisdiction, authority, or data required for such an audit, it said.
“FINRA does not have jurisdiction or authority over issuers like Next Bridge or transfer agents like AST. Transfer agents are overseen by the SEC, are responsible for maintaining issuer security holder records, and have responsibilities concerning the reconciliation and safekeeping of securities,” the agency emphasized.
In addition, FINRA said it does not possess the necessary information to conduct a “share count audit.” Some have suggested using “blue sheet” data for this purpose, but this data lacks the specifics required for such an audit. Blue sheet data provides transaction details but does not identify the positions held in a security on a particular date or whether a short sale was “naked.” Furthermore, blue sheet data is not designed to ascertain the beneficial owners of all MMTLP shares, and its access is strictly controlled due to its sensitive nature.
2.65 million shares out of 165.47 million
On the question of how much short selling was there in MMTLP around the time of the Next Bridge/MMTLP corporate action, FINRA said it occasionally collects short interest data from broker-dealers and publishes reports based on that information. However, short interest data for MMTLP around the time of the corporate action was not made publicly available due to the cancellation of MMTLP shares before the next reporting settlement date.
Based on regulatory efforts, FINRA estimates that the short interest position in MMTLP as of December 12, 2022, was approximately 2.65 million shares, which accounts for only 1.6% of the total shares outstanding. This short interest position had significantly decreased between November 15 and December 12.
“The short interest position in MMTLP had therefore decreased substantially—by nearly 60%—between November 15 and December 12. Specifically, short interest in MMTLP as of November 15, 2022, (approximately 6.4 million shares) declined around 27% to approximately 4.7 million shares as of November 30, 2022, and declined about a further 32% to approximately 2.65 million shares as of December 12,” the regulatory body clarified.
Moreover, daily short sale volume data, which has been a topic of discussion on social media, differs from short interest reports and often includes temporary short positions arising from handling customer orders. It does not reflect significant short positions in the conventional sense.
Excessive “naked” short selling resulting in “counterfeit shares”?
The concept of “counterfeit shares” has been discussed in social media conversations, particularly concerning “naked” short selling and FTDs in a security. A “naked” short sale, FINRA explained, generally refers to a short sale where the seller fails to borrow or arrange to borrow the securities for timely delivery, leading to an FTD. However, it’s important to note that “naked” short sales are not explicitly identified in short sale data, the agency said.
FINRA has found no evidence of significant “naked” short selling in MMTLP near its last day of trading, which contradicts claims of “counterfeit shares.” The SEC did not publish FTD data for MMTLP for December 12, but FTDs as of December 9 were minimal. Furthermore, based on estimates, only a tiny fraction of short positions in MMTLP as of December 12 could potentially have resulted in FTDs. Broker-dealers had adequate stock borrows or margin securities to cover the vast majority of open short positions.
These factors, together with other indicators, suggest that extensive “naked” short selling was not a significant issue in MMTLP near the end of its trading.
Have all MMTLP shareholders received their Next Bridge shares?
FINRA explained that Next Bridge has distributed its common stock to MMTLP shareholders as part of the corporate action, either directly or via their bank, broker, or nominee representatives. The absence of a CUSIP number for Next Bridge shares might have caused some confusion, but it does not affect the status of Next Bridge shares in a customer’s account.
Purchasers who bought MMTLP shares from short sellers may still have been recorded as eligible to receive Next Bridge shares in the distribution, provided the short seller managed to deliver MMTLP shares by December 12. However, as mentioned in a previous response, there were very few short positions in MMTLP as of December 12, and the majority of shares traded might have been settled using borrowed shares.
As the regulatory body noted above, there were a very small number of short positions in MMTLP as of December 12, 2022, that could potentially have resulted in FTDs.
Why did FINRA halt trading in MMTLP before December 12?
FINRA explained that it has the authority to impose a quoting and trading halt in an OTC equity security when it determines that an extraordinary event has occurred or is ongoing, causing a material effect on the market for the security or potential major disruption to the marketplace.
“FINRA made such a determination for MMTLP and halted trading on December 9 because, after December 12 (the settlement date for trades executed on December 8), the MMTLP shares would cease to be DTC-eligible; the MMTLP shares would be cancelled by the issuer at the time of the distribution; and Next Bridge common stock was not expected to be DTC-eligible,” the agency said.
FINRA also holds the view that, without implementing a trading halt, the circumstances mentioned above would have created substantial challenges for ongoing trading beyond December 8. This could have led to considerable uncertainty in the settlement and clearance process for such trades. Consequently, FINRA concluded that an extraordinary event, as defined by its trading halt rule, had taken place, and therefore, they halted MMTLP trading on December 9.
It’s worth noting that the presence or absence of short positions in MMTLP was not a determining factor in FINRA’s decision to halt trading; their primary concern was the clearance and settlement process.
Closing short positions
The Next Bridge/MMTLP corporate action did not mandate the closure of short positions, FINRA clarified. Broker-dealers have procedures in place to adjust short positions following a corporate action. Short sellers remain subject to close-out obligations under SEC Regulation SHO.
Investors with short positions in MMTLP would have corresponding short positions in Next Bridge if they did not close out their MMTLP positions before the corporate action. The existence of a loan does not necessarily require the purchaser to buy or return the securities until the lender recalls the loan.
“It is not uncommon for short positions to be open when a corporate action occurs,” explained FINRA. “Thus, an investor with a short position in MMTLP who did not close out that position before the corporate action would have a corresponding short position in Next Bridge.”
Very difficult for Next Bridge shareholders to trade their shares
Trading Next Bridge common stock is currently challenging, FINRA said, because Next Bridge has not taken the steps to facilitate secondary market trading. Next Bridge chose not to seek DTC eligibility, hindering central clearance and settlement of securities transactions.
“However, today it is very difficult for Next Bridge shareholders to trade their shares because Next Bridge has not taken the steps necessary to facilitate secondary market trading,” FINRA answered. “Next Bridge acknowledged that the absence of DTC eligibility would hamper trading.”
Furthermore, they opted not to obtain a CUSIP number, which prevents broker-dealers from obtaining a trading symbol for Next Bridge common stock.
“Unless Next Bridge takes steps to facilitate trading in its common stock, shareholders will continue to have difficulty trading their securities,” the regulatory body ended.
Information for this briefing was found via the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
That’s garbage. Finra didn’t have any issues with the s1 filings, and there were several. What happened was their hedge fund buddies sold 600 million counterfeit shares into a company that was going private. According to Finras rules, you cannot take shorts into a private company. The shorts should’ve been forced to close at market prices which were, on average, $4,000/share. They robbed retail investors of $2.4 trillion dollars and put the halt on to protect their golf buddies.
Sounds about right, JJ. This article is just a copy of the ongoing FINRA apologetics for shielding the short hedge funds’ catastrophic failure due to naked shorting. Time to pay the piper, GTSX, Canaccord, and others. Cut the nonsense, and you might avoid jail time.