The Small Cap Survey
For unique insight into the small cap companies trading on our markets, we recently engaged their C-suite to shed light upon some of the challenges they face when trying to drive and increase investor interest in their stock. Between March and May of 2017, OTC Markets Group Inc. conducted a survey of 117 CEOs and CFOs at the helm of the U.S. and international companies that trade on our OTCQX and OTCQB markets. The results of the inaugural Small Cap Survey revealed that small-cap companies, traditionally defined as having a market capitalization of under $2 billion, are continuing to miss key opportunities to attract new investors and raise capital.
The survey found that while increasing the liquidity of the company’s stock continues to be their primary capital market concern, followed by increasing share price, raising capital and attracting institutional investors, executives are still reticent to engage an untapped resource of retail investors.
Despite studies showing that these small-cap companies are owned by a majority of self-directed investors, attracting retail investors and garnering paid-for analyst research is not top-of-mind for smaller issuers. There remains a gap between the perception of their capital market needs vs. investor demand.
Capital Markets Challenges Faced by Small-Cap
Small-cap companies still face inherent capital market challenges as they navigate through the public markets. According to our survey most participants said (73.3 percent) that investor relations is still being managed by the CEO or CFO rather than a dedicated IR person (12.1 percent) or external IR firm (9.5 percent), and that management spends only 11 percent of its time on investor outreach.
Two-thirds of respondents (68.1 percent) reported that they do not have analysts covering their stock. Despite the availability of bonified, paid-for equity research, only 28.5 percent of small-cap companies use or intend to use paid-for research. Our results found that nearly 10 percent of small-cap companies said that they have never heard of paid-for equity research.
As small-cap companies have largely been ignored by Wall Street, smaller issuers need to rethink their approach to attracting new investors.
Instead of targeting large institutional investors, small-caps should focus on attracting their ‘natural’ investors: small institutions and individual, self-directed investors as well as family offices who are looking to become long-term owners of the company’s stock.
When it comes to capital raising, small-cap companies tend to leverage what they have done in the past. Of survey respondents who raised capital last year, 92.2 percent say they used a private placement or private-investment-in-public-equity (PIPE) financing, while 83.3 percent of companies who plan to raise capital in 2017 say they plan to use those offering types. In comparison, only 43.6 percent of survey respondents say they would use other financing options this year.
The Influence of the JOBS Acts
Promising news comes from the nearly 6.5 percent of respondents that said they plan to raise capital this year under the Jumpstart Our Business Startups Act (JOBS Act) Regulation A+, compared to only 1.6 percent of respondents who used that financing option in 2016. This clearly demonstrates an appetite for and the growing interest in this new exempt offering type among smaller issuers.
OTC Markets filed a petition to expand Regulation A+ to include current reporting small companies. While still under consideration by the U.S. Securities and Exchange Commission (SEC), OTC Markets remains hopeful that this offering type will be more broadly accessible so as to serve the needs of more small-cap companies in the near future.
Changes in market structure, an increased listing requirements and a decline in research sponsorship have also made the U.S capital markets challenging for small-cap companies. But that doesn’t mean there isn’t reason for optimism. Small-cap companies who demonstrate a willingness to step out of their comfort zones and try new approaches to today’s more innovative and cost-efficient capital raising methods will reap the benefits.