OTC Markets Survey: Increasing Liquidity is Top Concern for Small Cap Stocks

OTC Markets is out with a report that indicates small-cap companies are overlooking important ways they can boost investor interest in their stock.  The study, which was conducted between March and May 2017, surveyed 117 CEOs and CFOs of companies under $2 billion in market capitalization traded on the OTCQX and OTCQB markets.

According to the OTC Markets survey, small-cap companies believe that increasing the liquidity of their stock is their top capital market concern, followed by increasing their share price, raising capital and attracting institutional investors.  Attracting retail investors is currently not a top concern of smaller issuers, despite studies that show smaller companies are owned by a majority of self directed investors. This belies the gap between small companies’ perceptions about their capital market needs and investor demand.

“Small-cap companies have been largely ignored by Wall Street, so smaller issuers need to think differently when it comes to attracting new investors,” said Jason Paltrowitz, Executive Vice President of Corporate Services at OTC Markets Group.  “Instead of targeting large institutional investors, small-caps should focus on attracting their ‘natural’ investors: small institutions and individual, self-directed investors who are looking to become long-term owners of the company’s stock.  These findings underscore the importance for small-cap companies of having a robust retail IR strategy.”

In raising funding, 92.2% of survey respondents who raised capital in the last year say they used a private placement or private-investment-in-public-equity (PIPE) financing, while 83.3% of companies who plan to raise capital in 2017 say they plan to use those offering types.

In comparison, only 43.6% of survey respondents say they would use other financing options this year.

It was interesting to note that 6.5% of the survey respondents indicated they plan on using Reg A+, created by the JOBS Act of 2012, which allows issuers to solicit to both accredited and non accredited investors. OTC compared this to the year prior where only 1.6% of respondents who used the financing thus demonstrating increasing interest in using the updated exemption.

There is a petition to expand Reg A+ to include current reporting small companies under consideration by the U.S. Securities and Exchange Commission (SEC). If this is approved, Reg A+ could be available for more small-cap companies in the near future.

“The JOBS Act has expanded access to capital for small companies in online crowdfunding, however more still needs to be done to diversify the capital raising options available to smaller issuers,” added Paltrowitz.  “Expanding Regulation A+ to include current reporting small companies would expand this attractive financing option to thousands more small, public companies that are already providing high-quality disclosure to the SEC.  In addition, Congress should remove the restrictions on allowing companies to sell their shares into the public markets so they can get the full benefit of their public listing.”

Also included in the report was the fact that small-cap companies lack analyst coverage with 68.1% of respondents saying they have no analysts covering their stock.  OTC say there is the availability of high-quality paid-for equity research but only 28.5% of small-cap companies say they use or intend to use paid-for research.  Nearly 10 percent of small-cap companies say they have never heard of paid-for equity research.

Small-cap companies also use diverse tools to attract new investors, including non-deal roadshows, investment conferences and virtual investment conferences, according to the survey.

Social media is gaining in importance as an investor relations tool, with 49.5% of respondents saying they use Twitter, LinkedIn or other social media to reach new investors.

Despite significant capital market challenges, 73.3% of  small-cap companies surveyed say that investor relations is managed by the CEO or CFO instead of a dedicated IR person (12.1%) or external IR firm (9.5%) and that management spends only 11% of its time on investor outreach.

“Changes in market structure combined with increased listing requirements and a decline in research sponsorship have made the U.S capital markets challenging for small-cap companies,” explained Paltrowitz.  “But that doesn’t mean there isn’t reason for optimism.  Small-cap companies that are willing to step out of their comfort zones and try new approaches and new capital raising methods will reap the benefits.  A few simple regulatory changes could also speed access to capital for small issuers.”

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