"Our goals are to become a home for companies raising capital through the JOBS Act, to keep building up US and global securities and to build a diverse community of broker-dealers - and to do so by using technology and transparency." That was one of the insights that Cromwell Coulson, the visionary and long-time CEO of OTC Markets Group shared with me when I asked him what's next for his company, an unquestionable leader in over-the-counter (OTC) or "off-exchange" trading.
My interest in the 102-years old OTC Market Group wasn't casual. I believe, if you run a modern company, your stock options should be worth money and you should be able to turn around and sell or exercise them. In other words, your company stocks should be able to become your own currency.
I also believe that the OTC market -- which hit $238B in volume last year adding up $38B (compare it with venture capital investments topped $48B last year) - is set to be one of the most efficient channels to achieve liquidity, thanks to technology and latest regulations that are finally catching up.
But...when the OTC was removed from my list of viable options to raise capital and realize liquidity by one of my clients who explained to me that "the OTC has been always a magnet for fraudsters and I don't want to hurt my reputation", I realized I needed to turn to Coulson for answers.
It turned out that some of the world's largest companies are actually listed on OTC Pink, such as Russia's Gazprom (OTCMKTS: OGZPY) -- the world's largest producer of natural gas -- and Swiss food and beverage giant Nestle (OTCMKTS: NSRGY).
Describing the current system, Cromwell said: "OTC Market Group operates OTC Link ATS - SEC regulated Alternative Trading System (ATS) that electronically connects a diverse network of broker-dealers that price and trade the 10,000 securities. The OTC market data is distributed widely through major market data distributors such as Bloomberg and Thomson Reuters."
The way OTC is structured allows companies the ability to "move up" in the marketplace as they provide better transparency. Coulson explained: "Small companies don't have a lot of natural liquidity so you need market makers, you need broker-dealers who are making markets providing liquidity so now such companies can claim "stares" as they are working their way up into the market." That market includes:
- OTCQX Best Marketplace: for established, global and growth companies (range from blue-chip companies like Roche, Volkswagen and Adidas to growing US and international companies)
- OTCQB Venture Marketplace: for entrepreneurial and development stage companies (since last May, companies must be current in their reporting to the SEC, to date there are over 780 verified companies traded).
- OTC Pink Open Marketplace: offers trading in a wide variety of securities from SEC reporting companies that are delinquent in their disclosure to foreign companies that limit distribution of disclosure to their home market to financially distressed and dark companies.
There is a lot of liquidity in securities that are very successful and Coulson names a Bitcoin fund as a perfect example of liquidity. He revealed: "SecondMarket raised a Bitcoin Investment Trust (GBTC) that now trades on OTCQX. It got full transparency, audited financials - there is a market now - which means this company is able to create liquidity for its investors. A lot of time companies get frustrated because they don't have their story ready. But that's how the market works."
He added that the OTC is hyper-aware of the risks of fraud, particularly in the microcap space. "OTC did an interesting study a couple years ago which showed that it's relatively cheap and easy to be an SEC reporting company if you have little revenue and no assets. The most intriguing result of the study is that the majority of the problem in the small/micro-cap fraud arena in terms of investor losses is actually in companies that are CURRENT in their reporting to the SEC. That is one of the reasons the OTC introduced the stricter standards to its OTCQB Venture Marketplace."
It is also worth noting that OTC is a truly global exchange. About 70 percent of companies listed there are U.S.-based, however they represent only 30 per cent in dollar trading volume.
Coulson points out that OTC is a global leader in "exchange graduation." He said: "If you are a smaller company, you want to know how many companies "graduated" from the exchange -- the same way if you go to a law school, you want to know how many people become lawyers. Last year there were 83 "exchange graduates" up-listing from OTC marketplaces to a NYSE, NASDAQ or NYSE MKT listing. It is a score given the fact that for example TSX Venture (Canada) and LSE AIM Market (UK) got only 22 and 5 consequently."
Let's talk pricing... It costs $10,000 a year in annual fees to be listed on OTCQB, $15,000 - on OTCQBX and there are no annual fees for OTC Pink. For the companies doing Reg A+, the costs to join the exchange should be significantly reduced to less than $50,000.
BTW, the OTC's Slow PO has been filling the gap for small companies seeking to raise capital and provide liquidity for decades. Rule 506 of Regulation D, one of the most widely-used offering exemptions from SEC registration, allows a company to raise as much capital as it chooses from an unlimited number of "accredited investors" and up to 35 other sophisticated investors.
Finally, OTC is developing new rule requirements for companies interested in going public on its marketplaces following the Regulation A+ offering. The new Regulation A+ rules will become effective on June 19, 2015 and among other changes non-accredited investors will be allowed to participate in a federally-exempt offerings. The OTC is preparing a new reporting standard for Reg A+ securities and predicts that OTCQX and OTCQB marketplaces will become preferred secondary trading markets for companies that raise capital under the JOBS Act, including using Reg A+.
Victoria Silchenko, Ph.D. is an alternative funding expert, Founder & CEO of business consultancy Metropole Capital Group and Creator and Producer of the Alternative Funding Forum set to be in Los Angeles on Nov 6th this year. She is also an Adjunct Professor on "Entrepreneurial Finance" at CalLutheran University. LinkedIn:www.linkedin.com/in/victoriametropolecapital/, Twitter @MetropoleGlobal