OTCQX WOOING NEW ISSUERS, COMPETITION

While Congress ponders reform of Regulation A, legislation to regulate crowdfunding and other proposed measures
aimed at boosting capital formation
for micro cap companies, existing and anticipated trading platforms in the private sector are emerging as a potential solution with or without new laws.
Nasdaq OMX Group is expected to launch its BX Venture Market by the end of the year. The new national exchange will serve small companies that fail to list on other markets.
Rodman & Renshaw Capital Group is buying some assets of the OTC Bulletin
Board stock quotation system from the Financial Industry Regulatory Authority. In August, Rodman hired two executives to lead the venture, and it is expected to announce more information regarding its plans next year.
Representatives of Nasdaq and of Rodman
couldn’t be reached.
Meanwhile, OTC Markets Group is beginning to see more U.S. companies gravitate toward its OTCQX electronic trading platform, according to Cromwell Coulson, CEO of OTC Markets. Until recently, OTCQX had primarily focused on attracting international companies since its launch in 2007.
The OTCQX is OTC Markets’ top trading
tier. It requires companies to maintain certain financial and operational standards while filing audited financial reports with the Securities and Exchange Commission or OTCQX.com.
Additionally, companies that want to be quoted on the OTCQX must hire a law firm or an investment bank to act as a designated
advisor for disclosure, or “DAD.” The DAD reviews the company’s information
for application to OTCQX and for continued trading on the platform. (A bank or attorney sponsoring foreign companies
is known as a Principal American Liaison, or “PAL.”)
Currently, 286 companies trade on OTCQX and all but 31 are foreign issuers. But 10 U.S. companies have moved to the platform already this year. Likewise, U.S. OTCQX companies are now showing up in the PIPE market.
Some 300 companies will be trading
on the OCTQX platform by the end of 2011, Coulson forecasted. The new entrants will eventually consist of a more even mix between domestic and international
companies, he said. Coulson credits the trading success that international companies
have had on the platform for creating
more domestic awareness.
“A lot of U.S. companies have made a substantial investment in being SEC-reporting, but it is very hard for an investor
to identify good disclosure and what is a real company with an interesting business”
just by the fact that the companies are reporting, he said. “We’re talking more and more to the legal and investment
banking community who are looking
at OTCQX and saying, ‘Wow. This could actually be a better platform for our companies.’”
Micro Cap Blues
The effort to launch or beef up trading platforms for small U.S. companies parallels
a growing debate over how much regulation is needed of micro cap securities.
While they’re seen as critical to job creation and innovation, the companies number in the tens of thousands and are hounded by perceptions of fraud. Among other consequences, rules addressing past fraudulent behavior in the penny stock world have created barriers to funding for small companies.
But competition between the OTCQX platform and other markets should help to provide more micro cap capital-formation opportunities, while creating more transparency
for investors, Coulson said. He participated in a roundtable discussion, hosted by the SEC, on the execution, clearance and settlement of micro cap securities on Oct. 17.
Accurate disclosures are the key to rooting out micro cap fraud, Coulson said. Listing rules on exchanges largely assure investors trading large company stocks that a listed company’s financial information
is of a certain quality. DADs play a similar role for buyers of OTCQX securities,
he suggested.
“The SEC says investors should be very cynical of micro cap companies because even if they do file reports with the commission, the SEC brings a lot of actions against the companies for bad or false disclosures,” Coulson said. “So the ability to bring professional supervision into this marketplace is such an advantage.
It’s going to make for better information
for investors.”
In mid-October, Chicago-based market
maker Citadel Securities signed with OTC Markets in a move that should further boost liquidity in the micro cap space.
Not only will Citadel make a market in many of the stocks trading on OTC Markets platforms, but it also will create
an automated trading system that will pair buy and sell orders without as much human intervention, said Benjamin Small, a quantitative researcher with Citadel.
For investors and companies, that will ultimately translate into lower trading
costs that stem from fees and spreads, he said.
“By automating this marketplace,we’re hoping to make it a more efficient way to infuse capital into these small companies,” Small said.
Emerging PIPE Candidates
Of the 10 U.S. companies that began trading on the OTCQX platform this year, nine file reports with the SEC, said Tim Ryan, managing director of business development
at OTC Markets. Some of the more recent additions include GigOptix Inc., EpiCept Corp., General Cannabis and Imperial Petroleum.
Companies delisting from an exchange or moving up from a lower OTC Markets tier are fueling the nascent growth of U.S. companies trading on the OTCQX. GigOptix, a provider of telecom
and network system components based in San Jose, Calif., moved up to the OTCQX from the OTCQB tier on Aug. 16. Companies that trade on the OTCQB file reports with the commission.
EpiCept, a Tarrytown, N.Y.-based pharmaceutical company, delisted from Nasdaq in mid-September and began trading
on the OTCQX on Sept. 19. EpiCept, which has issued at least 18 PIPEs to raise $139.7 million over the last six years, also remains listed on the Nasdaq Stockholm Exchange.
San Francisco-based investment bank Merriman Holdings said on Oct. 26 that it plans to move its listing from the Nasdaq to OTCQX around Nov. 18. The investment bank serves as a DAD and sponsored five OTCQX issuers in the third quarter this year – GigOptix and four companies listed on Canada’s TSX Venture Exchange. Merriman has whittled its operations down to focus on small cap company research and banking,
under a strategy shift announced in early October.
Merriman Co-chairman Jon Merriman said in a statement that it made sense to trade on the OTCQX because the firm was a “strong advocate” of the platform.
“We expect to see our trading liquidity increase as a result of the greater visibility and sponsorship that the QX provides,” he said.
Some OTCQX companies are now showing up in the PIPE market. So far this year, at least 75 OTC companies have raised nearly $773 million in 92 PIPEs. That’s more than the 65 companies that completed at least 78 deals in all of 2010, but less than the roughly $990 million that they raised.
Of all OTC PIPEs completed this year, four U.S. OTCQX companies have raised $26 million in five deals. In 2010 no U.S.-based, OTCQX companies issued PIPEs.
Companies that trade on OTC Markets’
Pink and Grey platforms – the designated
tiers for companies that provide less disclosure, if any at all – are doing fewer PIPEs. Twelve OTC companies that trade on the Pink and Grey platforms have raised $144.8 million in 14 transactions
this year. Over the same period in 2010, 31 Pink and Grey companies took in $308.5 million in 34 PIPEs.
Meanwhile, the number of OTCQB PIPE issuers has climbed to 51 this year compared with 13 over the same 2010 period. Those companies have attracted $565 million in 64 PIPEs to date in 2011, compared with $115.5 million in 14 deals in 2010.
Several OTC companies that have issued PIPEs over the last two years have moved on to national exchanges, including Black Diamond, a Salt Lake City-based maker of mountain-climbing and skiing gear; oil and gas producer Saratoga Resources; and Greenville, S.C., bank holding company Palmetto Bancshares. Coulson envisions that trend growing as the OTCQX attracts more U.S. companies.
“I think a lot of companies are going to use our platform to test the waters and then move up to an exchange when they’re big enough to make it work right,” he said. “The better we do, the better NYSE and Nasdaq are going to do.”

http://www.otcmarkets.com/content/doc/PIPEsReport_11_2011.pdf

by Joe Gose
Joe Gose may be reached at joe@dealflow.
com
Joe Gose may