Don’t Look Now: You’re Public

Recently, at a Crowdfunding conference in L.A., I met with three company CEOs all in the process of doing Reg A+ deals.  When I asked them about their plans for secondary trading, I was surprised by the answer.  All three responded with some variation of “we don’t plan on going public – we will just issue the shares, there won’t be a market.” Upon returning home I found another company advertising in GQ magazine offering shares for their Reg A+ deal.  In the Risks and Disclosure section of their Reg. A+ materials I came upon this statement:

Your shares are not easily transferable. You should not plan on being able to readily transfer and/or resell your security. Currently there is no market or liquidity for these shares and the company does not have any plans to list these shares on an exchange or other secondary market. At some point the company may choose to do so, but until then you should plan to hold your investment for a significant period of time before a “liquidation event” occurs. A “liquidation event” is when the company either lists their shares on an exchange, is acquired, or goes bankrupt.

It has become increasingly clear that many companies and advisors in the process of, or contemplating, a Reg A+ offering are unaware of what it means to issue freely tradable shares.

While the company may not plan on “going public,” the reality is that with Reg A+ they are issuing freely tradable shares.  Any outside investor can bring their shares to a broker and request a sale.  To facilitate orderly transactions and meet regulatory obligations, a broker-dealer is required to ask FINRA to create a symbol and allow trade reporting and dissemination.  That will, in effect, bring that company’s share trading into the public view.

The Process of Going Public is Relatively Simple

Not to get too bogged down in market mechanics – but the process of going public is relatively simple.  A market maker will file a form with FINRA to ensure that adequate current information is publicly available, and, once approved, will be able to publish quotes, execute and report trades.  The company now has a public quote of their shares, open for all to see, and secondary market trading can take place.

I was shocked at how such an important detail in a company’s life was so easily overlooked and dismissed.   I was also concerned by the surprise of these companies when hearing this fact.  So now that its known, how should a company prepare?

First, you must have a view on how you want your company positioned.  Once approved by FINRA, newly public companies trade on Pink.  The Pink Market or, as we call it, the Open Market, is home to all types of companies.  From dark, distressed and bankrupt companies to large international issuers who use it as their secondary market.  Because of the “bargain bin” nature of this market, brokers, clearing firms and custodians put a significant amount of restrictions on the securities within it.  While the shares can trade, investors face extra work, risk controls and diligence making the process more difficult and onerous.

Second, consider the effect on the company’s reputation.  Having spent all the time and effort to engage investors, tell your story and issue shares, do you really want your company trading alongside less open and transparent peers?  Do you want your company’s stock price based on only supply and demand rather than fundamentals?  How does it look to your current and, hopefully, prospective investors if there is inconsistent disclosure available and the risk of information asymmetries?

Third, you must also think about tradability.  While Reg A+ solved the problem of national Blue Sky for the issuance of the shares, it does not address it in the secondary market.  Investable companies wanting to cast as wide a net possible for new investors, optimize liquidity and ensure the best research coverage need to think about managing this on the day after completing their deal.

If You’re Thinking About Listing on a National Exchange…

One potential answer is to think about listing on a national exchange.  However, if you have read these posts or followed myriad discussions about how exchanges no longer work for small cap companies, you will know that this is not the optimal answer.  Exchanges are expensive, time consuming and put a significant time burden on your leadership team.  As an early stage company, this is time and money better spent growing your business.  In particular, if your mindset was never to be a public company then an exchange listing is a huge step.  As it stands now, once you list on an exchange you can no longer raise money using Reg. A+ (which allows you to raise up to $50 million PER YEAR).  If you are successful once, why wouldn’t you want to leave the door open to using Reg. A+ to issue more capital in the future?

The key is to try to optimize the benefits of being public while still managing cost and time.

This is where OTCQX comes in.  In its 10th year, OTCQX is designed to give companies the benefit of being public without all the burden of an exchange listing.  We let companies use their Reg A+ disclosure rather than deal with Sarbanes Oxley and full SEC disclosure.  We have created lighter touch corporate governance standards that meet the needs of early stage companies, and are tailor made for companies completing a Reg. A+ offering.

Ultimately the decision for how your company “goes public” should be yours – whether you choose to accept it is up to you.

Jason Paltrowitz is Executive Vice President, Corporate Services at OTC Markets Group, where he is responsible for managing the firm’s international and domestic Corporate Services business. Drawing upon his expertise in cross-border trading and as a recognized proponent of Reg A+ and small company capital raising, Jason is an advocate for small cap issuers, start-ups, and entrepreneurial innovators working to alleviate the cost, time and complexity associated with being a public company. Prior to joining OTC Markets in October 2013, Jason was Managing Director and Segment Head at JP Morgan Chase responsible for the custody, clearing and collateral management business in the Corporate and Investment Bank division. Jason also held multiple senior management positions at BNY Mellon, most notably, as Head of M&A for the Financial Markets and Treasury Services Sector and 11 years as the Head of the Global Capital Markets Group in the Depositary Receipt Division. Jason currently serves on the Board of Directors of the Crowdfunding Professional Association (CfPA) and also served as a member of the Board of Directors at OTC Markets Group from 2008 – 2011. Jason holds a Bachelor's degree in International Relations from Boston University and received his MBA from the NYU Stern School of Business.

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