In July 2018, Bank of America/Merrill Lynch banned purchases of “risky securities” or “penny stocks,” defined as stocks under $5 per share from companies with a market cap below $300 million. A few weeks later the bank moved to also restrict the sale of penny stocks, but later amended the policy to give financial advisors time to exit positions. It then advised clients that penny stocks would be subject to regulatory review, and that those who wanted to sell would experience execution delays. So, a lot of effort is being expended at BofA to protect clients interested in buying or selling penny stocks. And, according to reports, big banks UBS and Morgan Stanley also have detailed review processes in place when it comes to so called penny stocks.
As a firm that works almost exclusively with microcap companies, (described by the SEC as companies with a market capitalization of less than $250 or $300 million), we’re not at all shocked by BofA’s “new” policy, because in our experience, the big financial firms have largely been avoiding microcap stocks for the past several years. In a 2013 white paper, the SEC characterized microcap stocks as “low priced stocks issued by the smallest of companies” and advised that “accurate information about such companies may be difficult to find.” The white paper went on to say that “When publicly available information is scarce, fraudsters can easily spread false information about microcap companies, making profits while creating losses for unsuspecting investors. Even in the absence of fraud, microcap stocks historically have been more volatile and less liquid than the stock of larger corporations.” These are all valid points, and we believe investors should do their due diligence no matter the size of the company they are interested in. But we take issue with painting the entire microcap sector with an unfairly negative brush.
So what can a small public company do to counteract market wariness and, in certain cases, stringent reviews?
1) Provide Accurate and Timely Information - Make sure that Company information is public, detailed and up to date. For any public company, and particularly smaller companies with less of a track record and few or no analysts providing perspective, it’s imperative to be transparent with timely and accurate financial reporting, news of strategic developments and reporting progress toward clearly defined goals.
2) Host Quarterly Earnings Calls – As a small company you might not think you have the resources to conduct an earnings call each quarter, but an “in person” quarterly review from the CEO and CFO goes a long way to establish investor trust and confidence.
3) Present a Polished Website – Your website can be simple, but it should include all the details a new investor needs to understand what you do and how you do it. Provide straightforward, non-hypey examples of your products and services, market position, and industries you serve. Include an investor relations tab and keep it up to date so that investors can find your most recent financials, presentations and events.
4) Attend Investor Conferences – Like the quarterly conference calls, conferences provide accessibility to the management team which can go a long way in developing the interest and then the trust of potential investors. It’s much more reassuring to meet a small company CEO and to hear his perspective on the Company’s progress than relying solely on SEC filings.
No doubt, fraud has been an issue in the microcap sector. However, with transparent, timely and concise communication, a visible management team and, ideally, a steadily improving business model, you can avoid the plight of the much maligned microcap or “penny” stock. Is that your phone? I bet it’s BofA calling . . .
Jennifer Belodeau, Vice President, IMS