As social media increasingly becomes part of the investor relations communications platform, it is critical to understand the securities laws surrounding the utilization of social media, particularly as it relates to material disclosures. We found the below link, forwarded to us by Andrew Shapiro at Lawndale Capital, particularly helpful.
http://www.daypitney.com/news/newsDetail.aspx?pkID=3931
John Nesbett
President, IMS
Is there really no interest in microcap public companies? Many experts will tell you so. They will tell you that investor interest and access to capital has diminished substantially in the microcap arena.
I have a different view based on what we are seeing with our clients. Yes, the landscape has changed dramatically over the past 20 years, and yes, there are new challenges. These challenges, though, if understood correctly, create opportunity.
Challenge: The microcap value trap– Given the inability to find sell side sponsorship such as research and investment banking, microcap companies feel that they are locked in a chronic “value trap” and do not have an equity currency which justifies being public.
Opportunity: The numbers suggest something different– At October 31, 2011 the Russell 1000 index, which is comprised of the largest 1000 publicly traded companies in the U.S., had an average price to earnings multiple of 14X earnings. The Russell Microcap Index, which is comprised of the smallest publicly traded companies, had an average price to earnings multiple of 16X earnings. Quality small public companies can achieve valuations that exceed their more liquid counterparts.
Challenge: Retail brokers cannot recommend microcaps– Compliance concerns have made it virtually impossible for retail brokers to recommend microcap stocks to their clients. They can purchase the stocks in their own accounts, or take orders from clients, but they cannot recommend the stocks.
Opportunity: Emergence of the “self directed” individual investor– However, the resources and pricing for an individual investor to be active in the microcap marketplace have changed dramatically. Brokers have become financial planners and frequently individual investors will purchase individual stocks through a discount brokerage account. The presence of the “self directed” investor is in fact real and growing.
Challenge: There is no research coverage for microcaps: For public companies under $150 million market cap, there is virtually no brokerage firm research coverage available. There are exceptions, specifically some boutique research firms. Furthermore, small to mid-sized investment banks will occasionally pick up coverage to build a relationship with a company so that they are in close proximity should banking business avail itself. Nonetheless, it is true – coverage is virtually gone.
Opportunity: Buy side does their own research these days– The bottom line is that the buy side (institutional investors) do their own research in the microcap marketplace. Rarely do they depend on someone else’s models or ideas. If a public company provides thorough disclosures and minimizes information “asymmetry”, the buy side has enough data to be able to make an investment decision. Furthermore, the buy side has begun to broadcast their own research on sites such as Seeking Alpha and Sum Zero. For example, below is the description of SumZero from their home page:
“SumZero is the leading global community for buyside investment professionals. The site has rapidly grown to 5,991 elite hedge fund, private equity, and mutual fund analysts - almost every brand-name hedge fund and mutual fund is represented in SumZero’s user base. The concept is simple. There are 3,719 full-length, peer-rated investment write-ups in SumZero’s database (covering equities, credit, macro, commodities, and other asset classes). By contributing one idea, a member gains access to the entire database. Additionally, there are thousands of companies in SumZero’s database of extensively researched companies, each of which is tied to one or more buyside analysts. An analyst can easily identify a list of other leading buyside analysts who have done work on the company he/she is interested in and contact them to compare notes, deepen each other’s understanding, and build one’s professional network.”
Challenge: There are fewer and fewer institutional investors who will look at microcaps: Funds need liquidity to both buy and sell stocks. They need a certain dollar volume a day and need to be able to purchase a certain amount in order to impact their portfolio. Microcap companies not only have small market capitalization by definition, but also tend to have limited trading volume given their smaller float.
Opportunity: The proliferation of funds with smaller Assets Under Management (AUM) has created a new, large audience for Microcaps: Yes, there is limited interest in microcaps at brokerage firms given their need to focus on larger cap companies to drive trading commissions. The unfortunate reality is that the buy side doesn’t “pay” the sell side like it used to. This problem is compounded when dealing with microcap companies with low volume. Also, small managers with limited assets under management purchase smaller positions and hence are not called on by brokerage firms as much. However, for an issuer, this audience is critical. A 200,000 share trade in a $3 stock, while not a huge commission for a brokerage firm, can be very meaningful for a microcap company in building its shareholder base and average volume. So the answer is for microcap companies to not only work with the sell-side, but also to go directly to the microcap investors on their own, preferably through a quality agency such as IMS.
John Nesbett
President, IMS
In an extensive study titled “Investor Relations, Firm Visibility, and Investor Following” conducted by professors at Harvard and UPenn, results have found that increased investor relations, specifically with a quality IR firm, have a significant effect on a company’s interactions with the markets and important information intermediaries. Not only did company disclosure become more transparent through the partnership, but market activity and the direct impact on investors were both clearly impacted by the help of an IR firm. Below is an excerpt of the study’s conclusive findings:
This paper provides one of the first extensive investigations of the process and consequences of investor relations (IR) activities geared toward attracting increased following from investors and information intermediaries. Through interviews and surveys with IR professionals, we learn that (1) the IR process focuses on management access and company visibility as key drivers of the strategy’s success, (2) the mix of visibility-creating factors (e.g. disclosure, media, analysts) used varies across company types, but attracting institutional investors is always a goal, (3) the importance of formal disclosure is highly dependent on whether a base level of information already exists to support other IR activities.
Our empirical tests examine a sample of 210 small and mid cap companies that initiated an IR strategy. We use hiring of an IR firm to identify firms that have substantially increased their IR activities. In comparison to a matched sample, we find the companies hiring IR firms are significantly different in valuation, prior visibility, and structural changes to the firm. We find no relation between initiating an IR strategy and either prior accounting or returns performance or future accounting performance. We incorporate this model as control variables when investigating the impact of initiating IR.
We examine the impact of the new IR program by investigating changes in firm disclosure and information intermediary following, as well as the impact on investors and market activity. We find increases in disclosure that indicate firms are ensuring there is a sufficient base level of information regarding the firm. We control for these increases when examining the other impacts of IR to ensure our results are not driven solely by the increased information in these disclosures. We find an immediate and sustained increase in media coverage. While an increase in analyst coverage is slightly less consistent, it still significantly increasing over the year. We find pervasive and growing increases in the number of institutional investors and the percentage of institutional ownership. This increase includes shift toward institutions that are more geographically distant and that tend to invest in larger companies, consistent with the IR activities helping to overcome local bias and to create visibility to a different type of investor. Finally, we find that market valuation has improved by the end of the first year of increased IR. Combined, these results suggest that increased IR has a significant impact on the firm’s interactions with the markets and important information intermediaries. (Miller, Bushee 32, 33)
To read more on the study, please visit: http://www.kellogg.northwestern.edu/accounting/papers/GregMiller.pdf
John Nesbett
President, IMS
This is a commonly debated topic. Both initiatives require careful, company specific analysis to determine if it is the right move for shareholders. Below is an overview of some issues surrounding dividends and buybacks as it pertains specifically to micro and small cap public companies.
BX Venture Market was recently approved by the SEC as NASDAQ’s newest listing exchange. The market serves as a new option for smaller companies that cannot meet the quantitative standards of NYSE, NYSE Amex or of the new exchange’s parent market, NASDAQ. Companies that may find the BX Venture Market an appealing listing option are:
1. Companies presently trading on an over-the-counter market.
2. Companies that have been or will be delisted by another market for failure to meet the market standards.
3. Small, less-liquid companies looking to expand capital.
According to the BX Venture Market website (www.bxventure.com), a company must meet the following quantitative standards to be listed on the new market, depending on their listing status prior to getting listed on BX Venture:
This new market is further evidence of the shifting trading landscape for small public companies. The BX Venture Market offers a viable option to help quality companies overcome two hurdles for “up listings”:
1) Number of Shareholders: Both the Amex and NASDAQ require that a listing company have 400 shareholders. The new BX Venture Exchange will only require that a company have 200 shareholders. This is significant given the plethora of quality companies that are prohibited from NASDAQ or NYSE Amex given their limited number of shares outstanding and hence low shareholder count. These companies, many of them very profitable, are penalized for maintaining a tight capital structure as they grow. The lower share count threshold on the BX Venture Exchange provides these companies with a stepping stone as they grow their business.
2) Share price: Similarly, the initial listing price, $1.00 per share, is below the $2 or $3 requirement for Amex (depending on various criteria), and well below Nasdaq’s $4 requirement. There are many viable, fully filing public companies that are simply too small to move above the somewhat arbitrary share price thresholds of the exchanges.
It is important to note that the BX Venture Exchange will also attract companies that have been delisted from Nasdaq or Amex, possibly creating a population of underperforming companies. Hopefully, any proliferation of underperforming companies will be balanced with quality companies fighting their way up the food chain.
John Nesbett
President, IMS
In February, more than 800 publicly traded companies moved from being dually quoted on OTCBB and the OTC Markets (the new name for the Pink Sheets) to being quoted exclusively on the OTC Markets. Over 95% of prices quoted in the OTC marketplace are quoted now on the OTC Markets platform. This quiet shift – not widely reported on but creating mass confusion and concern among smaller public companies, is redefining the landscape. A key issue to understand is that the old “Pink Sheets”, while still providing a trading platform for non-filing public companies, has recreated itself into a multi-tiered system appropriate for fully compliant and responsible public companies. In short, the OTCQB and OTCQX are becoming the new Bulletin Board.
Why is this happening?
This migration has been happening for a few years. Essentially, OTCBB is an arcane system, while OTC Markets is an electronic market which traders like better. It is not the discretion of the issuers where they are traded in the OTC market – rather it is the choice of the market makers and they are choosing OTC Markets.
Companies are finding themselves traded exclusively on the OTC Markets because the final market maker who had been holding out and trading the stock on OTCBB chose to trade only on OTC Markets. A large cut over happened last month because a large market maker, our sources tell us UBS, stopped making OTCBB markets. Knight Securities, the other large OTC trader, stopped making markets on OTCBB many months ago.
What about the “.PK” suffix?
From an investor relations standpoint, one of the issues with this is the lingering “.pk” suffix that is tagged to companies that have migrated to OTC Markets but are fully filing companies. This is a “Yahoo Specific” issue and a hold over from when OTC Markets was Pink Sheets before the rebranding and multi-tiered system. OTC Markets is in contact with Yahoo and has been lobbying for them to change the “.pk” designation. OTC Markets is hopeful that the “pk” suffix will be dropped by “the end of the second quarter” of this year.
The new tier system
There are 3 tiers in the new OTC Markets trading platform. Companies that have been migrated over and are fully filing automatically go to the OTCQB level. The levels are defined:
OTCQX: The premium level. In order to be a “QX” company, a company needs to 1) have a $0.10 bid 2) have $2 million in assets and 3) $5 million market cap. There is a cost of $15,000 per year, and the issuer also needs to partner with a “Dad” sponsor, which would be a lawyer or investment bank. This is similar to the European system. The Dad sponsors charge between $10,000 (law firms) and $25,000 plus (investment banks) per year.
OTCQB: The basic level for fully filing companies
Pink Sheets: The lower level which does not require a company to file its financials. This level is generally what investors think of when they think of the legacy “Pink Sheets” and it is important that companies move investors away from associating them with this category. The investing public’s impression will evolve quickly and individual investors, brokers and institutions will get comfortable as they understand the tiered system and the rebranding de-emphasizes the lower tier.
On the OTC Markets web site, one can get a full level II trading screen showing market makers and the bid/asks. This will ultimately be shifting over to a “paid for” service in July 2011 and will be bundled in the “OTC Intelligence” product for issuers. This product will include: 1) Level II quotes 2) News Service – which will allow you to send news releases to market makers through the OTC Markets trading platform so they are more likely to see it and 3) Blue Sky service which monitors which states you are Blue Sky compliant. This service will cost $8,900 per year.
Our experience thus far is that the companies that we are familiar with who have migrated over to OTC Markets have not experienced diminished volume or transparency. The key issue is the .pk suffix which harkens back to the “Pink Sheets” days, but this suffix will likely be removed soon.
John Nesbett
President, IMS
A strategic IR program can get stale and formulaic: Earnings calls, road shows to major financial markets, the occasional press release. Here are some ideas to mix up your program to make it more impactful.
1) Visit Secondary Markets: Markets like Dallas, St. Louis, Connecticut. These markets are less “brokered” then New York Boston and San Francisco. Hence, the investor will be more likely to hear your story.
2) Guest Speaker: Include a guest employee speaker on your earnings call. For example, the head of engineering can speak to a new product line under development or the director of international sales can talk about success in Asia. Investors frequently find this informative and it shows depth of management.
3) Simulcast Your Annual Meeting: This can be a good forum for the CEO to provide a “state of the Union” address on the business. The immediate audience is the owners of the company, so making the annual meeting accessible to current shareholders and informing them as to what you are doing on their behalf will show well to a broader audience of potential new investors.
4) Write a Background Report: Small companies are all seeking research coverage that largely doesn’t exist. To help fill that void, you can write your own 12 to 15 page background report which provides a detailed overview of your company as a complement to your SEC filings.
5) Send Thank You Notes: As per my previous post, this is a lost art and a simple way to stand out from the onslaught of public companies trying to get investors’ attention.
John Nesbett
President, IMS
1) Be Self Critical — When advising our clients, we are very sensitive not to “over position” certain issues. Management candor forges stronger investor relationships. A good earnings call reviews what the company is doing well, but also what the company is not doing well and how they are fixing it.
2) Don’t Just Read The Numbers — Boring, boring, boring. By the time of the call, investors have access to the press release and likely the filing, which includes all the numbers. Give the high level numbers, and whenever possible, speak in terms of relative percentages and ratios. Furthermore, focus on metrics that you monitor to assess your business, not just numbers that investors instinctively look at. The goal is to get investors thinking about the business just like you think about the business.
3) Friendly Reminders Increase Attendance — Earnings periods are busy for investors. A few gentle reminders about your call will go a long way in increasing attendance. Include conference call information in the release, and also send out a separate reminder the morning of the call. That being said, don’t be offended if attendance on the live call is light. Investors depend more and more on simulcasts and replays.
4) Use Slides — Larger companies frequently use slides and smaller companies rarely do. We have found that this initiative differentiates a smaller company by demonstrating professionalism, positively altering investors’ confidence in the company’s future.
5) Plant a Question – Nothing wrong with it. There are few things more painful than the operator polling for questions and, after a 10 second pause “there seem to be no questions so we will turn the call back over to management for closing remarks.” Make sure the audience knows that others are listening. At IMS, we touch base with a few of the supportive investors and urge them to ask questions during the Q&A.
John Nesbett
President, IMS
Good investor relations is the art of helping investors appreciate your company beyond the basic financial metrics. If stocks were efficiently valued exclusively based on metrics, then we would only file our financials and be done with it – no investor conferences, no press releases, no roadshows. But investing in small public companies is, more than anything else, people doing business with people. At IMS, we have had most of our companies on the road this fall and, not coincidentally; most of the stocks have gone up. The companies are doing well and the market has improved, but the shares also appreciated because two people sat across the table from each other and discussed the merits and challenges of the business. A relationship and trust, was formed.
Interestingly, two of our best performing companies have one thing in common: the CEO writes a personal thank you note to everyone he meets. They also happen to be two of our older CEOs, which is illustrative of the fading cultural protocol of thank you letters. Investors have mentioned numerous times to us how much they appreciated the gesture, which serves not only as a courteous differentiator in a busy marketplace, but also adds to the foundation of the business relationships that are being built.
John Nesbett
President, IMS
In the age of the Internet, there has been a proliferation of investor conferences, reinforcing the premium that investors put on meeting management teams in person. Managed correctly, investor conferences are an integral and efficient component of a public company’s investor relations strategy. Here are some ideas for maximizing the impact of participating at investor conferences:
Do Not Depend On The Bank To Publicize Your Attendance — Investment banks do a good job at getting the word out about a conference. That being said, conferences, particularly the micro cap conferences, are getting bigger and bigger. You can easily get lost. A public company should alert interested investors, and it is important to reach out to investors in the geographic area of the conference to encourage them to attend your presentation.
Stand At The Door — Someone should stand at the door of your presentation room. This person should know the investment community and be able to identify people from their name tags. Collecting attendee names is invaluable and the right person (such as someone from IMS) will have the ability to identify many of the attendees.
Present On The First Day — The first day is always better, with significantly higher attendance and attention span from investors. You don’t always have control over when you present; for invite only conferences the bank will generally give preference to companies it has banked for or follows. For issuer paid conferences, you can frequently influence your presentation spot by simply paying quickly.
Present In The Morning — Wall Street tends to rise early and be a morning crowd. By the afternoon, investors tend to fade. If possible, take a morning slot.
Augment With Your Own Investor Meetings — It makes sense if you are in a particular market to augment the presentation and conference one-on-one meetings with your own investor meetings.
Simulcast - This is money well spent. While public companies may do a good job updating investors on developments, they frequently lose sight of providing a general corporate overview from senior management to the broader investing public. A conference simulcast is the perfect platform to accomplish this. If you have the choice, opt for the slide and audio, not just audio.
Screen The One-On-One Schedule — There are frequently vendors who sign up for one-on-one meetings that may not make sense for you to meet with. Make sure you review and screen the one-on-one meeting itinerary and cancel meetings that are not a good use of your time.
John Nesbett
President, IMS
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