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Many of our clients who are graduating from private to
public companies want to know which exchange would be
best for getting listed and traded. In the next
newsletter we will delve into the four main listing
options, but today let’s look at the two most common
entry vehicles: the OTC Bulletin Board (OTC-BB) and the
American Stock Exchange (AMEX).
We have outlined the many reasons a company would want
to move from a private entity into a publicly traded one
in previous newsletters. Greater access to capital,
stronger negotiating position, and liquidity are some of
the major factors. Once the decision is made to go
public, where should the company trade?
The OTC-BB is the default choice. Requirements for entry
are the lowest of any of the major U.S. exchanges.
Companies listed on the exchange must make all SEC
required disclosures to assure investor access to
financial information. This means that investors have
access to all quarterly and annual reports from the
company. These reports are available on the SEC website.
Almost all companies trading on the OTC-BB are microcap
companies. The information available to an investor on
these companies is usually obtained from the companies
themselves through SEC filings or from promoters hired
by the companies to enhance stock performance. There is
little to no analysis performed by major brokerages, and
very little institutional coverage or interest in these
companies.
The relationship between a company and the OTC-BB is
through a market maker. As opposed to the other
exchanges, there is no direct relationship between the
exchange and the company itself. The OTC-BB's
relationship is with the firm making a market in the OTC
security rather than with the issuer. For the other
major United States securities exchanges the
relationship is between the exchange and the company,
not a broker-dealer making a market in that firm's
security.
The OTC - BB is different from the other major United
States exchanges in that it does not impose minimum
quantitative financial listing standards (i.e., a
minimum net worth or market capitalization requirement),
it does not provide automated trade executions; does not
maintain relationships with quoted issuers and it does
not have the same obligations for its Market Makers.
The exchange does offer some transparency in the fact
that trade information is reported electronically and is
available to the public. Trades must be reported to the
exchange within 90 seconds. There are over 3,000
companies trading on the OTC-BB now, versus over 6,000
in 1998 (the year before SEC disclosure information was
mandatory.) There are approximately 330 market makers
doing business in this market.
The OTC-BB offers an opportunity for investors in the
company to achieve liquidity and to access additional
capital through public offerings. A publicly traded
stock can also be a significant advantage when
negotiating acquisition and joint venture agreements.
However, the market in OTC-BB stocks is considered more
risky by investors due to the lack of information
available and the lack of control over trading activity.
It is not uncommon to find that OTC – BB securities
contain a high level of investment risk because they are
not required to meet minimum financial statement listing
requirements. Their price volatility is high in part
because of low liquidity and trading volume and there is
little third party research on these firms.
For companies that can meet minimal financial
requirements for entry, the AMEX is a logical next step.
There are several reasons for this. First of all, there
is greater prestige associated with a major exchange
listing. Your stock is immediately considered less
risky, as you must meet not only disclosure
requirements, but exchange requirements as well.
The second advantage is the fact that you are now tied
directly to the exchange. Instead of market makers
trading your securities for their own interests, you
have a specialist who manages your float and attempts to
keep volatility lower. In other words, there is less
risk of a market maker or short seller controlling your
stock price (to your detriment.) Specialists are
obligated to maintain a fair quotation spread and to
stabilize prices for their securities, as well as seek
price improvement on all orders entrusted to them.
Another advantage is that you will have greater access
to institutional capital. Third party analysis may
become available on your business, putting you on major
investors’ radar screens.
These factors translate into a greater position
regarding the strength of your company when negotiating
mergers and acquisitions.
Entry into the exchange means that you must meet certain
requirements. The Exchange has established certain
minimum numerical standards, set forth here. The fact
that an applicant may meet the Exchange's numerical
standards does not necessarily mean that its application
will be approved. Other factors which will also be
considered include the nature of a company's business,
the market for its products, the reputation of its
management, its historical record and pattern of growth,
its financial integrity, its demonstrated earning power
and its future outlook.
As mentioned, you now have more requirements to meet.
The AMEX has strict ethics and disclosure requirements.
There must be a compliance and code of ethics program in
your company. You must make timely public disclosure of
board vacancies, board changes, material facts that may
affect stock value, and any analyst concerns about your
company.
The company must also immediately respond to rumors and
reports, investigating them and making a report on them
as soon as possible. The company must investigate
unusual activity regarding its stock to ensure that
there is no rumor or report that may be affecting the
stock. Promotional announcements must not unduly
influence the public regarding the stock, and must
follow strict standards. Naturally, insider trading is
not allowed and is monitored very closely.
On the heels of the current corporate scandals like
Enron, Adelphia, Tyco, etc., there are increased
requirements regarding corporate governance as well. At
least a majority of the board of directors of your
company must be independent. There must be an auditing
committee comprised of independent directors to ensure
proper governance.
All of these requirements will add a measure of burden
on the company, as new directors will probably need to
be brought in, and additional work done for compliance.
However, the transparency and relative security of the
investment of an AMEX listing may well outweigh these
burdens.
Which listing should your company choose? If you have
any questions about this, or need more information
regarding going public, reverse mergers, public shells,
or corporate capital strategies, call us at
949-253-4675. We are here to help you maximize your
options and grow your business.
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