In a previous blog post, I talked about some of the “pains” associated with a being an exchange-listed company today. Not only does it cost $2.5 million to do an IPO onto a U.S. exchange, it costs on average $1.5 million per year in legal, accounting, advisory and compliance costs to maintain an exchange listing, according to a 2011 study by the IPO Task Force. And that doesn’t include the value of management’s time and internal resources that are diverted to meet increasingly complex exchange rules and processes – and away from growing the business.
At OTC Markets Group, our goal is to remove the obstacles associated with being a publicly-traded company by reducing costs and complexities for business and investors. In this post, I outline the three ways we’re helping to take the pain out of being public:
- our data-driven market standards
- technology-driven information distribution
- broker-dealer-based trading model
Data-driven market standards
While stock exchange listing requirements require companies to hire an array of expensive, third-party experts to verify their compliance (think: compensation consultants), OTC Markets Group employs an “information first” market model that empowers companies to improve the quality of information available and allows investors to decide on the merits of an investment.
For example, while a company must be SEC reporting to trade on a stock exchange, OTC Markets Group recognizes several disclosure standards for providing adequate current information to investors. These include: International Reporting for international exchange-listed companies, Bank Reporting for banks that report to a bank regulator, Regulation A Reporting and Alternative Reporting.
At the heart of our approach to disclosure is our belief in transparency and that it’s often unnecessarily complex to duplicate the high-quality disclosure that companies provide to their regulators. A foreign company listed on a qualified foreign stock exchange that is current in its reporting to its home country regulator shouldn’t be required to comply with an additional U.S. disclosure regime. Likewise, a small, publicly-traded U.S. community bank that provides high-quality, timely disclosure to its bank regulators shouldn’t need to be SEC reporting as well.
Our Alternative Reporting Standard allows non-SEC reporting companies with audited financials to make information publicly-available pursuant to federal securities laws. We based these data-driven financial standards for U.S. and global companies on our OTCQX Best Market on the state Uniform Securities Act and the SEC Penny Stock definition to efficiently separate out the more investable securities of operating companies.
In another example of our streamlined market requirements for companies outside the S&P 500, corporate governance standards for U.S. companies on our OTCQX market are based on well-established state securities regulations and common sense best practices already employed by a majority of public companies. The exchanges require that a company’s board of directors include a complete Compensation Committee and a Nominating Committee (along with the all the associated compensation and nominating consultants) and that the overall board be comprised of a majority of independent directors (among other requirements). In contrast, OTCQX Corporate Governance Standards require at least 2 independent board directors, an audit committee with a majority of independent directors and that companies hold annual shareholders’ meetings and make certain disclosures to shareholders in advance of these meetings. These standards fit the needs of smaller companies that often have founders and other significant shareholders on their boards while also safeguarding outside investors and ensuring they have high-quality disclosure.
As a result of our “information first” focus, the overall transparency of our markets has increased liquidity and reduced volatility for companies as they meet higher market standards. For example, the dollar volume of OTCQX securities has increased to nearly 20% of total OTC trading volume today compared to 15% in 2014. Meanwhile, the dollar volume of securities on our Pink No Information market tier has declined to less than 1% of total OTC trading from 5% three years ago.
Today, OTCQX, OTCQB and Pink companies that provide current information to investors make up 99% of total OTC dollar volume.
OTC companies are providing more information about themselves to investors than ever before, and investors are rewarding the most transparent companies accordingly.
Leveraging technology to increase transparency and reduce risk
As a technology company, we leverage technology to make information more widely available to investors wherever they analyze, value or trade OTC securities. This not only lowers costs for companies, it also reduces the risks associated with trading and investing in OTC securities.
For example, non-SEC-reporting companies often find themselves in a black hole of no information that makes investors and brokers wary of trading their securities. Because these companies don’t submit their financial statements to the SEC’s Edgar system, their information isn’t widely distributed to the major financial portals and data feeds. To alleviate this problem, OTC Markets Group has partnered with Edgar Online to convert companies’ fundamental data into XBRL format and distribute it widely across market data feeds, into broker-dealer risk systems and onto the Web.
As a result, everyone from large, non-SEC-reporting foreign companies to small community banks to small, alternative and Regulation A+ reporting public companies can see their balance sheets and income statements appear on websites like Yahoo! Finance, Google Finance and in major online brokerages.
Small-cap companies often suffer from a lack of analyst coverage. We use technology to solve that problem, too. Last year, we partnered with Morningstar, the investment research company, to provide OTCQX and OTCQB companies with quantitative Morningstar ratings on their stock on our website. All OTCQX and OTCQB companies receive a 1-to-5 star Morningstar rating on their quote page, providing investors with an independent, quantitative valuation of their stock so they can make more informed investment decisions.
We are also using technology to solve one of the critical challenges impacting secondary trading liquidity of OTC securities: state Blue Sky compliance. Broker-dealers rely on individual state Blue Sky laws to know whether they can lawfully recommend or solicit a security to investors in the state where they reside. When Standard & Poor’s recently discontinued publication of its paper-based securities manual, OTC Markets began working directly with state regulators to obtain recognition for the OTCQX and OTCQB markets based on the quality of information these companies provide to the public through our website. So far, 21 states recognize the OTCQX market for their disclosure-driven Blue State manual exemptions and 18 recognize OTCQB.
As a result of the high-quality market data and information we make available on our website, www.otcmarkets.com is replacing paper securities manuals for demonstrating state Blue Sky regulatory compliance.
Broker-dealer-based network model of trading
Lastly, OTC Markets Group’s dealer-based trading network helps small companies take the pain out of being public. Academic studies point to the superiority of dealer markets for optimizing trading in smaller and less liquid securities. Unlike stock exchanges, which utilize centralized matching engines to fill broker-dealer orders anonymously at rapid speed, OTC Markets’ OTC Link ATS connects a network of broker-dealers who compete directly on price, execution quality and the ability to provide additional liquidity to the market.
A broker-dealer network is a critical component of market quality for small-cap stocks which lack the natural share liquidity of larger cap stocks. While the exchanges operate centralized auction markets that are designed to channel the natural liquidity that exists in its listed companies, dealer markets – like OTC Markets’ OTC Link ATS – treat liquidity as a resource that needs to be provided as a service by market participants.
There are numerous benefits to being a publicly-traded company: visibility, liquidity, a public valuation, access to capital and the ability to convey your company’s story and reputation to a community of stakeholders. Unfortunately, the high costs, time and regulatory burden associated with doing an IPO onto a U.S. stock exchange and growing burdens of being an exchange-listed company have caused many issuers to avoid the public markets altogether.
At OTC Markets Group, we believe being public shouldn’t be painful. That’s why we work hard to find solutions that meet the needs of all public companies and their investors in an efficient and informed manner.