OTC Markets sees jump in foreign firms seeking access to US markets
OTC Markets has seen a 70 percent increase in listings from firms outside of North America, with 81 companies choosing the alternative trading venue in a bid to tap US investors.
That figure – of listings from January 1, 2021 to January 13, 2022 – is up from 24 foreign firms across 2020 and 19 in 2019.
The jump in foreign listings (the figures exclude companies from Canada) on the firm’s OTCQX and OTCQB marketplaces comes as smaller companies seek to attract some of the growing retail money as well as US family offices and tier three and four investors, which Jason Paltrowitz, executive vice president at OTC Group, notes often have a higher risk appetite.
Almost half of the 81 new listings come from Australia and Asia, while 12 are European and 26 are UK companies. Those figures are up from 10 UK companies, five from continental Europe and just nine companies from ‘rest of world’ in 2020.
Paltrowitz tells IR Magazine that a confluence of factors is driving the appeal of a US listing – particularly for the smaller firms that typically choose OTC Markets.
Research from IR Magazine, published in the Global and Regional Investor Relations Practice Report 2021, shows that while the proportion of shares held globally by institutional investors stands at 60 percent and is little changed on recent years, in North America at least, a growing percentage of shares is now in retail hands. While retail figures are little changed in Europe or Asia, in North America the proportion of shares held by individual shareholders is now at 17 percent – a 3 percentage-point increase on just one year before.
The research also finds that small-cap companies are by far the more popular choice for retail investors: 24 percent of small-cap shares are held by individual investors. And these are the investors that small firms listing with OTC Markets are looking to attract.
The small-cap target
‘Most of the companies [listing in the past year] are early-stage growth companies,’ explains Paltrowitz. ‘They’re small caps; in some cases, even nano-caps.’ He adds that for ‘99 percent’ of foreign companies, OTC Markets is a secondary listing. The alternative marketplace is a popular option for smaller firms because companies can list without being SEC-registered, without being Sarbanes-Oxley-compliant and for what Paltrowitz describes as ‘minimal cost’.
‘If you are already listed on a foreign exchange, to cross-trade on our market becomes a very easy and cost-effective way to access US investors,’ he says. ‘The fact is that for most of these companies, large institutional investors are not what they’re going to target anyway: they’re too small, they’re too early-stage.’
Then, when it comes to the retail option, he adds that ‘you don’t have the same retail investor culture in Europe as you do in the US’, where there is not only more willingness to invest but also a different approach to risk.
‘US investors are more willing to invest in pre-revenue stories,’ Paltrowitz says. ‘There is much greater risk appetite in the US.’ And it’s not just the appeal of the more open US retail investor that is attracting companies. ‘The US also has this culture of high-net-worth family offices and third and fourth tier institutions that you don’t necessarily attract in the UK or continental Europe,’ he explains, adding that although these are investors who might primarily invest in tech stocks, in general, they are just ‘much more willing to take a closer look and invest in that story’.
An alien in New York
The appeal of having some form of listing in the US perhaps doesn’t need spelling out but Paltrowitz says ‘the hope for these companies is that you build up your investor base, which, in turn, helps your firm do two things: it helps narrow the valuation gap, so hopefully you start seeing better valuations because of the influx of US investors, and it also improves liquidity.’
He notes that some companies feel that although their home market has proven a good location for raising money, ‘some companies don’t feel they are getting the liquidity they deserve. If you can supplement that with interest from US investors, all the better.’
As growth companies, many of the firms already talk a more US-friendly talk, says Paltrowitz, but some still need guidance on marketing to a different audience. OTC Markets has a very inclusive approach to its listed companies. The firm has its Virtual Investor Conference series, which Paltrowitz says has almost doubled in participants since the start of the pandemic. It also publishes a newsletter, has a podcast series and allows its listed companies to post investor presentations, corporate videos or their own research to the OTC Markets website.
The other element is ‘really just a lot of social media’. The small-cap companies looking to list on OTC Markets ‘don’t have big IR budgets, and they don’t have in-house IR teams,’ notes Paltrowitz. ‘IR might be side-of-desk for the CFO or perhaps the company might hire outside help.’
This makes social media – which might mean LinkedIn but might also include YouTube or Instagram – even more important in his view, ‘because it’s easy, it’s light-touch and you can have that constant drip of news without spending an inordinate amount of time putting everything together.’
So what should smaller UK, European or Asia-Pacific companies be thinking about if they want to pursue a US listing?
‘For us, the advice is always that if you have a product or service that is not very centric to the footprint where you are – so something that crosses borders – then it’s silly not to tap into the US equity investment market for all the reasons every other company wants to increase North American ownership: it decreases volatility, it increases liquidity, it broadens your shareholder base and it narrows valuations.’