OTCQX: 10 years in the life of ‘a child of the internet age’
This week marks 10 years since OTC Markets launched OTCQX, a market that launched with 12 founding companies and has grown to include 399 firms – both US and international – accounting for $1.4 tn in market capitalization and $36.8 bn in annual dollar volume, almost a fifth of the total annual dollar volume of all over-the-counter securities.
The original motivation to launch OTCQX was to offer a platform for companies trading on the firm’s marketplace that weren’t penny stocks or speculative, explains Cromwell Coulson, president, CEO and director of OTC Markets Group. ‘We realized there were many great companies that met financial standards, had a culture of compliance and were investor-focused,’ he explains.
Over time, that evolved into a focus on how OTC could make it more cost-effective ‘and less painful’ to be public, he adds. To do this, OTC took a data-driven and disclosure-driven approach that aimed to make the most of the online world, ‘because the traditional stock exchange model is actually quite antiquated from a listings perspective.’
Over the years, the standards have changed: penny stocks were prohibited, the sponsorship model changed and commonsense corporate governance standards adopted. Today, OTCQX is considered an ‘established public market’ by the SEC and has achieved blue sky recognitionin 20 states. But the flat $20,000 annual fee plus $5,000 application fee for listing on OTCQX remains less than half the cost of Nasdaq’s lowest fee, and OTCQX saw its first IPO last year when Elio Motors, a crowdfunded start-up creating an electric, three-wheeled car, went public in February 2016.
This brings Coulson to the issue of regulation. Elio’s IPO was made possible by crowdfunding, the direct result of new rules intended to increase funding for entrepreneurs and small businesses during the recession, and allow companies to raise cash from non-accredited investors.
To take advantage of the changes brought in by the Jumpstart Our Business Startups Act (JOBS Act) Regulation A+, OTCQX created a new reporting standard that would enable trading on OTCQX by companies using the JOBS Act Regulation A+ to raise capital and go public.
Cutting the red tape
Despite this, Coulson describes the potential cutting back of regulation under the Trump administration as ‘a great opportunity’.
‘Back in October, I would have told you I saw regulation as a one-way train that just becomes more costly, complex and more painful,’ he says when asked where he sees regulation going today. ‘But now I think we are in a real moment in the US where there is going to be a mandate to cut red tape.’
That isn’t to say that Coulson is an advocate of a regulation free-for-all. He simply means that some rules are falling short. ‘Regulation is not going away,’ he says. ‘It’s just about trying to figure out which 10 percent or 20 percent is causing 90 percent of the pain and doesn’t really deliver the benefits.’
A big challenge – one that’s faced by OTCQX and other stock exchanges – but which Coulson says is not being talked about enough is companies choosing to stay private. And when it comes to public, small-cap companies, many continue to raise most of their capital privately, he says, adding that this is a sign of a ‘broken system’.
‘We need to make public offerings cost-effective and competitive for small public companies. It should not be that public companies prefer to raise their capital privately,’ says Coulson.
The small-cap renaissance
While certain regulation might have been holding back some types of business – Coulson cites community banks as an example – it is also paving the way for new opportunities, especially for small firms. Coulson predicts a rise in regulations allowing crowdfunding and online securities, though he admits the interest isn’t quite there yet.
‘But if we get crowdfunding and online securities right, there is going to be a renaissance of small public companies and access to capital,’ he adds. ‘You are going to see companies as they move and grow be able to raise equity capital from outside investors, both online and through traditional brokers, and you are going to see more distributed shareholder bases. And these companies, having raised the capital through offerings that are transparent, will be more comfortable coming into the public markets.’
Continuing the small-cap challenges theme, Coulson moves onto an issue that any small-cap IRO will be all too familiar with: research coverage.
Acknowledging that this is an increasingly frustrating area for smaller companies, Coulson highlights some of the potential solutions he sees to the perennial problem. Crowd-sourced investment analysis is part of the three-pronged approach OTCQX applies, and the marketplace has linked with Seeking Alpha, though Coulson notes that such forums can be tricky for IROs.
‘If you are a public company, you want to be building a community on the Seeking Alphas of the world,’ he says. ‘That as an IRO is challenging: there will be some who say nice things and some that say terrible things about you, but at least you have a forum to make sure your company’s viewpoint is part of the discussion and you are putting your numbers out there.’
OTCQX also teamed up with Morningstar to provide investors with a quantitative research report, ‘available free on our website’ for OCTQX companies. But this also presents a challenge for IROs. ‘Computers are going to become more and more part of the stock-picking process,’ predicts Coulson, so IROs need to work out ‘how you make sure your company’s information is consumable by both man and machine’.
The final prong in the research fork is one that, regardless of their views on the practice, all small-cap companies will have considered: company-sponsored research. Here, OTC launched a ‘research marketplace’, currently featuring ACF Equity Research, Edison and Sidoti & Company.
Again, however, Coulson comes back to regulation: ‘We have been talking to some of the trade associations for regional investment bankers in the US and I think part of the regulatory push-back on separating research from investment banking has been a mistake for small and mid-cap companies,’ he says. ‘Hopefully, some regulatory changes will take place so we can have research be part of the investment banking process.’
All about online
So what’s next for OTC’s ‘child of the internet age’?
‘We are really about thinking how we make information available online,’ says Coulson. ‘And as time goes by and we grow, the gap between a company listed on the NYSE or Nasdaq and the informational and transactional experience for a company on OTCQX diminishes.
‘We have 20 states recognizing us for blue sky. When Apple [had its IPO] on Nasdaq, Nasdaq had 27 states; we are getting close.’