At first glance, cell—Cyte Genetics Corp. is just one of many overhyped U.S.-based companies whose shares are quoted on the OTC Bulletin Board in the U.S. But upon closer inspection, CellCyte is symptomatic of a large and complicated problem that the B.C. Securities Commission is trying to wrestle to the ground.

CellCyte is a Nevada-registered company originally called Shepard Inc. It was created by promoters in Vancouver, purportedly as a mineral exploration firm. But like many of Howe Street’s creations, it was destined for something else.

According to a registration statement filed with the U.S. Securities and Exchange Commission, Shepard’s only asset was a mineral claim in the Northwest Territories, acquired for just $2,500. Consulting geologist William Timmins of Van-couver had proposed a two-phase exploration program, the first phase costing $5,000 — hardly enough to scratch the surface. The company’s total assets, according to statements filed by Vancouver-based chartered accounting firm Morgan & Co., were slightly less than $35,000.

Proof that this company was being created for some other purpose came in January 2007, when Shepard announced it would acquire CellCyte, a Kirkland, Wash.-based company “engaged in the discovery and development of breakthrough stem cell enabling therapeutics.” Shepard’s name was changed to CellCyte, completing the metamorphosis.

In June, CellCyte — with the help of solicitor Thomas Deutsch of law firm Lang Michener LLP in Vancouver — filed a registration state-ment showing that a major shareholder was Newport Capital Corp., a Zurich-based company controlled by Brent Pierce, who is currently serving a 15-year stock-market ban in British Columbia for fraud.

For years, Pierce has been able to tiptoe around his B.C. ban by promoting U.S.-based OTC companies such as CellCyte, which are not reporting issuers in B.C. and, therefore, are outside the jurisdiction of B.C. securities regulators.

In October, Pierce hired U.S. pen-for-hire James Rapholz to tout the stock: “Now, a practical ‘pill-in-a-bottle’ application puts the miracle of regenerative medicine within immediate reach!” gushed Rapholz in a 12-page report. To produce and distribute this piece, Pierce — through his private company, Stockgroup AG — paid Rapholz a stunning $445,000.

By Dec. 7, the stock had climbed to $7.35 a share on the OTCBB market, giving the company a total market capitalization of $440 million. But if history repeats itself, gravity will eventually prevail, bringing grief to investors and reputational damage to Vancouver.

CellCyte is an example of the problem facing B.C. regulators. Promoters have been able to bypass the B.C. regulatory regime by selling shares under exemptions to B.C. registration requirements (usually by selling shares to close friends and family). Then, they register those shares with the SEC and get them quoted on the OTCBB or the Pink Sheets, both of which are simply quotation systems that have very little oversight. Unlike exchanges, they have no minimum financial requirements, disclosure is minimal, news releases are not scrutinized and trading is not monitored.

This regulatory gap has spawned much stock-market mayhem in Vancouver. Promoters float sham business ventures with sham share distributions. After they register the shares for trading in the U.S., they gather them up, so they control the entire float and can easily manipulate the share price. Then, they vend in a more promotable deal and orchestrate a “pump and dump” scheme. The cross-border nature of the promotion complicates investigations and prosecutions.

There are now 500 B.C.-connected companies that trade on the OTCBB and 200 more that trade on the Pink Sheets, representing 70% of the Canadian total, according to Martin Eady, corporate finance director with the BCSC.

OTC issuers not only loom large nationally but also internationally. According to U.S.-based research firm SME Capital Markets, more small businesses based in B.C. (107) registered their shares for trading in the U.S. in 2006 than those in any other jurisdiction in the world except for California (164). Every other jurisdiction paled in comparison. New York, for example, had 76.

To register shares for resale in the U.S., issuers must file SB-2 registration statements. Lawyers must certify that all shares have been validly issued and auditors must consent to the use of their audit reports in the registration process. Fortunately for promoters in Vancouver, there are dozens of Vancouver-based legal and accounting firms willing to provide these services.

According to SME Capital, Van-couver-based chartered accounting firm Manning Elliott LLP is at the top of the list. It has helped more companies (34) file SB-2s than any other auditing firm in North America. Three other Vancouver-based CA firms also figured prominently in the rankings: Dale Matheson Carr-Hilton Labonte LLP placed second, with 30; Amisano Hansen came eighth, with 14; and Staley, Okada & Partners ranks tenth, with 13.

@page_break@The Vancouver offices of several large law firms are also active in this business. In 2006, Clark Wilson LLP ranked as the sixth-largest filing solicitor, with 26 registration statements; Lang Michener came tenth, with 14.

In 2005, the BCSC had become so alarmed by the proliferation of OTC issuers that it created a special unit to study the problem. This past June, BCSC chairman Doug Hyndman unveiled a package of proposed rules to bring these outlaw companies within the BCSC’s regulatory purview.

Under the new rules, an OTC issuer will be considered a reporting issuer in B.C. if: it has an office in the province; the business is administered in B.C.; the directors, the control person, the promoters and the majority of the public float are in the province; or the investor relations activities are carried out in B.C. Indeed, the proposed definition of an OTC issuer is so broad that the BCSC will probably be accused of exceeding its jurisdiction and may have to fend off legal challenges.

To discourage stock-rigging, the BCSC is proposing rules to prevent seed shareholders in B.C. from selling back their stock to the promoters. Instead, they will have to sell their shares through a broker, from an account in their own name, into the market.

Investment advisors will have to make sure they know who beneficially owns the stock before they trade it and also be prohibited from accepting delivery of OTC stock until that delivery is approved by a compliance person. This will presumably curb the use of B.C.-based investment dealers as conduits for OTC share manipulations and money laundering. The BCSC also has served notice that it will report to professional oversight groups any lawyers, accountants and geologists who knowingly aid sham deals.

At the moment, these rules are just proposed. Industry participants had until Dec. 31 to file written comments. IE