Despite myriad capital market challenges, small-cap companies are overlooking important ways they can boost investor interest in their stock, according to a new survey released today byOTC Markets Group Inc., operator of the OTCQX, OTCQB and Pink financial markets.
The study, which was conducted between March and May 2017, surveyed 117 CEOs and CFOs of U.S. and international companies under $2 billion in market capitalization traded on the OTCQX and OTCQB markets.
Small-cap companies say increasing the liquidity of their stock is their top capital market concern, followed by increasing their share price, raising capital and attracting institutional investors, according to the survey. Attracting retail investors is not a top concern of smaller issuers, despite studies that show smaller companies are owned by a majority of self directed investors[i], revealing a 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 companys stock. These findings underscore the importance for small-cap companies of having a robust retail IR strategy.
Small Companies Lack Diverse Financing Options…
When it comes to raising capital, small-cap companies also tend to stick to what they have done in the past. Of survey respondents who raised capital last year, 92.2 percent say they used a private placement or private-investment-in-public-equity (PIPE) financing, while 83.3 percent of companies who plan to raise capital in 2017 say they plan to use those offering types. In comparison, only 43.6 percent of survey respondents say they would use other financing options this year.
Of note, nearly 6.5 percent of respondents say they plan to raise capital this year under the Jumpstart Our Business Startups Act (JOBS Act) Regulation A+, compared to only 1.6 percent of respondents who used that financing option in 2016, demonstrating the growing popularity of the new exempt offering type among smaller issuers. With a petition to expand Regulation A+ to include current reporting small companies under consideration by the U.S. Securities and Exchange Commission (SEC), the offering type 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, said Mr. 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.
And Research Sponsorship…
Small-cap companies lack analyst coverage with two-thirds of respondents (68.1 percent) saying they have no analysts covering their stock. Despite the availability of high-quality paid-for equity research, only 28.5 percent 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.
Social Media is Gaining Traction as an IR Tool…
Small-cap companies 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 (IR) tool, with 49.5 percent of respondents saying they use Twitter, LinkedIn or other social media to reach new investors.
Yet, CEOs and CFOs are Still the Primary IR Contact at Their Companies
Despite significant capital market challenges, most small-cap companies (73.3 percent) say that investor relations is managed by the CEO or CFO instead of a dedicated IR person (12.1 percent) or external IR firm (9.5 percent) and that management spends only 11 percent of its time on investor outreach. One-third of managements time is spent on growing company revenues followed by complying with regulations (18 percent) and raising capital (17 percent). Small companies that establish a strong IR program are best positioned to overcome these key market challenges.
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, said Mr. Paltrowitz. But that doesnt mean there isnt 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.
