The changing face of equity research: OTC’s new service

Oct 20, 2016
<p>Jason Paltrowitz talks regulation, IR tech and the OTC Research Marketplace</p>

Last month, OTC Markets launched a new service: the OTC Research Marketplace, aimed at bringing OTCQX and OTCQB firms together with research providers. So far, three companies – ACF Equity Research, Edison and Sidoti & Company – have been added to the marketplace.

IR Magazine caught up with Jason Paltrowitz, executive vice president of corporate services at OTC Markets, to find out what OTC thinks about the current research climate, how it thinks its new marketplace can help smaller companies and what else IROs can do to get their companies noticed.

Jason Paltrowitz, OTC Markets
Jason Paltrowitz, OTC Markets

IR Magazine: How would you describe the current climate around equity research in the US? How does it differ from other regions, such as Europe?

Jason Paltrowitz: In the US, Wall Street research is offered by firms as a service to their clients and is paid for by commissions from trading and investment banking. That has taken a toll on small-cap companies, which tend to be less actively traded. The economics simply don’t support analyst coverage of these companies, even though they are the very ones that need it.

I think you are seeing a similar dynamic in Europe, but it is driven more by regulatory change with the unbundling of research from trading under Mifid. Ultimately, this is [set to become] a global phenomenon as the major banks will start implementing these changes across their operations worldwide.

IRM: Why has OTC decided to launch its Research Marketplace now and what are the key benefits? What are the logistics of using the service and the potential costs?

JP: We launched now because we saw a gap in the equity analyst coverage of small-cap companies. It is one of the key pieces of the puzzle when it comes to increasing access to capital and trading for small companies in our markets.

There are numerous benefits, especially for some of our smaller issuers. Research Marketplace provides them with Wall Street-grade, independent, third-party analysis of their company’s performance, valuation estimates and financials, operations and management that they can share with investors on their website and in their investor materials. These analyst reports and earnings estimates are also published in many of the major financial databases, providing key data points for both fundamental and quantitative investors as well as a strong ‘network effect’.

Companies that are interested in engaging one of the firms can contact them directly to discuss their process and pricing. We provide their contact information and sample research reports on the Research Marketplace section of our website [but] we don’t get involved in negotiations between issuers and the individual providers.

IRM: Can you tell me a bit more about OTC’s selection criteria for research providers?

JP: First, we won’t work with any firms that take stock as compensation – that’s important. Second, the firms need to be regulated. Of the three we’re working with, one is regulated by the SEC and is a Finra member broker-dealer; the other two are UK firms regulated by the Financial Conduct Authority.

The third criterion is editorial independence: all the firms we’re working with make clear that their research is unbiased. They allow clients to comment on the research and correct spelling errors, but they can’t change the content of what is written. Also, the firms can provide a price estimate and a valuation, but they can’t publish ‘buy’ or ‘sell’ ratings.

We expect many of these firms won’t have an investment bank business, which can also help avoid any perceived conflicts of interest.

IRM: Attitudes toward commissioned research can be somewhat negative. Is this something you see changing?

JP: The corporate-sponsored research market does have some bad actors. That’s why we are stringent about the criteria these firms need to meet. Clearly, this is paid-for research and the firms make that known upfront, but we think if they include these base levels of protections, it will ensure the research is broadly used and meaningful.

IRM: Other than commissioned research, what other tips would you offer IROs looking to boost coverage?

JP: We spend a lot of time educating our issuers about ways they can grow their shareholder base and maximize their visibility with US investors in a cost-effective manner. That’s a real challenge not only for small companies with limited resources, but also for large foreign companies that maybe only visit the US once a year.

One of our IR programs that has been incredibly well received by both US and international companies is our OTCQX Virtual Investor Conference (VIC) series. Essentially, company executives get to hold live webcast presentations with investors and answer their investors in real time. Thousands of investors have participated in our VICs over the past several months and we are in the process of scheduling two more next spring.

We also believe in the power of video: a few years ago, we began offering issuers the ability to publish investor and corporate videos through our OTC Disclosure & News Service and to our website. That has become one of the most popular features with both companies and investors.

IRM: OTC itself uses commissioned research. What do you see as the benefits and potential drawbacks of that?

JP: We use Edison and Sidoti, which both publish quarterly research on our company. We think these are valuable because they provide an independent, third-party analysis of our quarterly earnings and our company for investors. Sidoti also provides a price target.

We publish this data on the IR section of our website and make it available to investors that are interested in our company story. It helps round out our story.

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