Small and micro-cap markets have long been the incubators of opportunity for start-up and developing companies and the investors willing to assume the inherent risks. These markets afford innovators and entrepreneurs the ability to raise capital to prove concepts, grow and refine their business models, and provide risk-tolerant investors with ground-floor prospects. However, until recently, a lack of transparency made it difficult to discern between a legitimate investment and impropriety. OTC Markets Group’s (OTCQX: OTCM) segmented markets and trading platform have delivered the needed clarity and transparency for small and micro-cap companies to thrive and investors to make informed decisions.
A full understanding of this transition to transparency starts with understanding the difference between OTC Markets’ trading platform and exchanges like NASDAQ and the New York Stock Exchange. To get first-hand insight into the differences, as well as the advantages small and/or emerging companies are finding on this platform, QualityStocks conducted an interview with Jason Paltrowitz, executive vice president of Corporate Services at OTC Markets Group.
Hear the full interview here: http://www.qualitystocks.net/interview-otcm.php
OTC Markets Group operates broker-dealer markets where global public companies can raise capital, complete an acquisition, and provide liquidity for traders, investors and existing shareholders. OTC Markets’ three markets encompass a wide range of securities, including ADRs and foreign ordinary shares, dividend paying companies, SEC reporting companies, community banks, small and micro-cap companies, as well as large and mid-cap companies.
“What OTC Markets is, is actually an Alternative Trading System; so not truly an exchange by the exact definition of the word,” Paltrowitz tells QualityStocks. “We operate a platform on which we connect over a hundred broker-dealers and market makers who are linked on what’s called a dealer market. They’re able to message each other electronically to create liquidity for securities that trade off traditional exchanges. At OTC Markets, we have over 10,000 securities, many of them in that small and micro-cap space, as well as a number of global securities that choose to have their secondary trading in the States on the OTC market.”
OTC Markets Group’s platform is similar to other national exchanges, but dissimilar in a couple ways. For one, the trading infrastructure is different; as noted above, OTC Markets operates dealer markets rather than an exchange matching engine. Secondly, companies trading on OTC Markets’ markets can minimize regulatory burdens – and thus costs – required by national exchanges. The regulatory burden of national exchanges is complicated, has extensive compliance and legal requirements and is costly. OTC Markets’ structure provides numerous benefits for companies with tight budgets and big goals at a fraction of the cost.
“Our mission is really to give entrepreneurs and innovators the ability to run their businesses and not have to focus on all the rules and regulations associated with being on an exchange,” says Paltrowitz. “For small microcap companies that are still growing and in their development stages, we offer them a much lighter touch regulatory burden. We give them the ability to make all their information public so investors can decide what’s investable and what’s not.”
Paltrowitz describes OTC Markets’ model as “what NASDAQ was before NASDAQ became an exchange.”
“The NYSE and NASDAQ operate matching engines … which is great technology when you’re a very liquid security. But when you’re a small or micro-cap company that’s not as liquid, having market makers ready to create liquidity … is essential for small companies. We think a lesser regulatory burden, lower costs and our market structure make it very advantageous for small and micro-cap companies,” he explains.
OTC Markets organizes securities into three markets – OTCQX, OTCQB and Pink – with each company categorized by the quality and quantity of information it makes available to the public.
To qualify for the OTCQX market, companies must meet high financial standards, maintain compliance with U.S. securities laws, be current in their disclosures, and be sponsored by a professional third-party advisor. Cost for inclusion to this marketplace is $20,000 a year.
The OTCQB Venture Market is for early-stage companies that don’t meet the financial standards of the OTCQX, yet are still committed to providing a transparent trading and information experience for their investors. To be eligible, companies must be current in their reporting, undergo an annual verification and management certification process, meet a minimum $0.01 bid price test, and not be in bankruptcy. OTCQB costs a company only $10,000 a year.
OTC Markets’ Pink market offers broker-dealer trading in a wide variety of companies that are there by reasons of design, distress or default. Pink companies are further sub-categorized based on the quantity and quality of information they provide to investors: Current Information, Limited Information or No Information. Paltrowitz describes the latter of these companies as disengaged and not taking steps to make sure their information is open and transparent.
Investors familiar with the segmented markets now have much greater clarity when identifying options in the small-cap space. This clarity has provided the small-cap space a reputation as an incubator of opportunity for investors and the companies willing to put in the work to remain transparent.
“By creating great technology … also by creating platforms that allow companies to segment themselves and to be more open and transparent, we think we’ve cleaned up the market…. We’re giving investors and broker-dealers the ability to find great stories here first, before they become known to the world and maybe upgrade to a national exchange …. We think that for what is about 25% the cost of being on NASDAQ, you really do get 80 to 90% of the value of being publicly traded, again without all the cost and complexity,” says Paltrowitz.
With all the positive changes OTC Markets brings to the small-cap market, there’s more on the horizon thanks to the JOBS Act, which President Obama signed into law in 2012 to ease various securities regulations and stimulate more funding of small U.S. businesses. Paltrowitz notes particular advantages stemming from Regulation A+ of the Act, which pertains to equity crowdfunding rules. Under Regulation A+, growth companies can now raise up to $50 million from unaccredited investors and make those shares freely tradable in what many call a “mini-IPO.”
“The thing we’re most excited about … is the JOBS Act changes around Rule Reg A+. Actually, up until very, very recently we were what you’d call a secondary trading market; so we weren’t an IPO market. Companies couldn’t really go public in the traditional sense … Reg A+ has kind of changed the game and democratized finance. The IPO market had been for at least the last 20 years, really a closed market …. We’ve now made it social, data-driven and democratized so that everybody can participate in IPOs,” says Paltrowitz.
OTC Markets’ segmented markets, supplemented by Reg A+, have transformed the small-cap space, creating a trading environment that is increasingly attracting investors and growth companies in pursuit of their potential.
“We look at our future and we look at the future of crowdfunding, or crowdsourcing, for small entrepreneurial innovative companies needing to raise capital and being able to do it in the public markets, not just through a select few institutional investors. We think that’s really going to propel small company growth in the U.S., but certainly our business as well, as the natural place for those companies to trade,” says Paltrowitz.
For more information on OTC Markets Group and the OTCQX, OTCQB and Pink markets, visit www.OTCMarkets.com
