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Home > Nanotechnology Columns > Pearl > To Be Publicly Listed or Not To Be Publicly Listed and How Are They Publicly Listed? YOU Should be Asking the Questions.

Pearl Chin
Managing Director
Seraphima Ventures

A company being publicly listed or not may not have a direct correlation to whether or not it is more credible or financially stable for a investment. Here we discuss various ways of being "publicly listed" and the factors and degree of risk that must be considered and what they mean to investors and technology startup companies seeking to raise money through public listings as opposed to private fundraising.

February 16th, 2007

To Be Publicly Listed or Not To Be Publicly Listed and How Are They Publicly Listed? YOU Should be Asking the Questions.

Although I'd love to talk about how Harvard University stopped light which is all the buzz this week and that IBM is putting out chips with nanoscale circuitry, this is not the column for it and there are plenty of other sources for that information. Here we talk about the science of money. However, from these new research developments, there can be plenty of money made if you understand the full impact of controlling energy in all its forms that was never really thought to be controllable on a practical human scale.

Since my last articles in 2005, there have been major consolidations in the world stock market exchanges and creative ways to have small companies listed on public Over the Counter (OTC) type indices to raise money. I mentioned how this phenomenon has become very public (pun intended) recently for nanotech companies. Many of you are not familiar with these terms so I have put together a little primer on these in this article to get you warmed up so you can feel more comfortable with the terms. You can of course do your own internet research on them but it might be useful to know what it is you are searching for. This is by no means a comprehensive list of all available indices but it is intended as just a start to wet your appetite for more information.

Very simply, a stock exchange is a company which provides facilities to trade company stocks and other securities, such as the well known NASDAQ (National Association of Securities Dealers Automated Quotations system), New York Stock Exchange (NYSE) or American Stock Exchange (AMEX), London Stock Exchange, etc. A security has to be listed on a certain stock exchange in order to be traded and can only be traded by members and stock and share holders. NASDAQ is an electronic stock exchange and is the largest electronic screen-based stock market or equity securities market in the United States. NASDAQ was founded in 1971 by the National Association of Securities Dealers (NASD) and is owned and operated by The Nasdaq Stock Market, Inc. It may be of some interest that their stock lists on its own stock exchange (NASDAQ: NDAQ).

The term "over-the-counter" (OTC) here refers not to medicine sold in a drug store but to stocks in the U.S. that are not trading on a major stock exchange. You do not have to issue stock via the stock exchange nor must stock be traded on the exchange. Such trading is said to be "off exchange" or "over-the-counter". OTC generally means that the stock trades either on the Over-the-Counter Bulletin Board (OTCBB) or the "pink sheets". Neither OTCBB nor Pink Sheets is a stock exchange but are providers of pricing information for securities. OTCBB and pink sheet companies have fewer regulations than companies that must comply with than those that trade on a stock exchange.

The OTC Bulletin Board is a regulated quotation service in the United States, owned by the NASD, for stocks which are not listed on one of the major U.S. stock exchanges. OTCBB displays real-time quotes, last-sale prices and volume information for OTC companies. These securities do not meet the market capitalization, ownership, or other requirements of major stock exchanges. OTCBB companies do not have any filing or reporting requirements with NASDAQ stock market or the NASD but are subject to periodic filing requirements with the U.S. Securities and Exchange Commission (SEC).

"Pink Sheets" is an electronic quotation system that displays quotes from broker dealers for many OTC-type securities. Brokers who buy and sell OTC securities can use the Pink Sheets to publicize their bid and quotation prices. The term "Pink Sheets" comes from the color of paper they were historically printed on before electronic bulletin board technology took over. The quotes are published today by Pink Sheets LLC, a privately owned company. Pink Sheets LLC is neither an NASD broker-dealer, nor are they registered with the SEC. Most of the companies quoted in the Pink Sheets do not meet the minimum listing requirements for trading on a national stock exchange, such as the New York Stock Exchange or the NASDAQ. Pink Sheet companies listed do not need to fulfill any requirements (e.g. filing financial statements with the SEC). Since many of these companies do not file periodic reports or audited financial statements with the SEC, it is very difficult for investors to find reliable financial information about those companies. Most securities that trade this way are penny stocks or are from very small companies and because of the lack of stringent requirements to list their company publicly, these companies tend to be less stable and higher risk. However, higher risk and higher return go hand in hand but public information on these companies to make informed investment decisions is difficult to come by since they are not required to disclose anything to exist on the list and only need to pay fees. For all of these reasons, companies quoted in the Pink Sheets can be among the most risky investments. That's why you should take extra care to thoroughly research any company quoted exclusively in the Pink Sheets.

The Alternative Investments Market (AIM) is similar to the OTCBB but with the London Stock Exchange in the UK instead of the U.S. NASDAQ. Similarly, AIM also allows companies to list shares with less regulation and no requirements for capitalization or number of shares issued.

The PLUS Markets Group (previously Ofex PLC for off-exchange) is a trading facility for unquoted and unlisted OTC securities in the UK which specializes in small companies similar to the U.S.'s Pink Sheets. PLUS Markets Group or Ofex is regulated by the Financial Services Authority (FSA) in the UK, similar to the U.S. SEC.

FTSE Group is a British provider of stock market indices and associated data services much like Standard & Poor's (S&P) publishes financial research and analysis on U.S. stocks and bonds. FTSE is a joint venture between the Financial Times and London Stock Exchange. S&P is a division of McGraw-Hill Publishing Company. The FTSE Group maintains three indices for measuring the AIM, which are the FTSE AIM UK 50 Index, FTSE AIM 100 Index, and FTSE AIM All-Share Index.

There are many more exchanges around the world but the reason these particular exchanges and bulletin boards are discussed is to highlight what is going on with small tech companies going public or being listed and to explain the difference between publicly listing on a major stock exchange and publicly listing on an OTC-type bulletin board.

Traditionally, a company that is maturing and becoming more stable wishes to be listed on a major stock exchange to demonstrate to investors that it is successful and has much potential to grow and increase in value and that they should purchase their stock. This IPO was the goal in the past. However, in the U.S., the public company now has to comply with Sarbanes Oxley Act of 2002 regulations. The Sarbanes Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox. Sarbox is a United States federal law passed in response to the corporate and accounting scandals such as with Enron, Tyco and WorldCom. Companies are required to make sure their financials are independently audited and made public. This is very expensive because an outside accounting firm must be brought in regularly to do the federal SEC report filings as well as the executive management of the company having to certify the reports. The time and money spent on compliance reporting and the increased public scrutiny on a small company's operations may not be worth it for a small company which is more often than not just barely getting by meeting its development deadlines and rent payments.

In the last few years, significantly more companies have transferred from the larger stock exchanges to the AIM instead of the other way around which is not what is normally expected. The AIM requires less regulatory efforts for the companies relative to the U.S.'s Sarbanes-Oxley Act (SOX) of 2002. SOX imposed regulatory and financial disclosure requirements on companies listed in the United States, including those without any operations. These reporting and disclosure requirements for financial transparency would cost companies much in auditing and reporting fees and efforts. For these reasons the AIM has started to become an international exchange, due to its low-regulatory requirements, as more companies decide to list overseas on AIM. The AIM also has significant tax advantages for investors.

Private small companies are expected to have several rounds of fundraising relatively close together resulting in issuance and dilution of stock or equity for private investors. This is not the expectation with publicly listed companies. After being publicly listed and raising that first tranch of public money, it is often very difficult to raise another round of public funding. The public market traditionally expects publicly listed companies to be bringing in revenue from selling product to fund its operations, not still using those monies for product development. It mainly expects a public raise of money to expand current operations for growth. Hence, this type of fundraising through public listing may not be appropriate for small technology startup companies whose products require significant development monies and time to get to a point of stability. Investors who invest in OTC-type companies should expect these companies to remain unstable for some time and will need to raise more money in another round of fundraising for another cash infusion soon.

Unfortunately raising private funding for small companies is not easy and raising public money may seem easier. This is especially attractive to smaller startup technology companies who may become weary of having to continually explain why they are worth investing and are behind paying the rent. When companies become desperate for cash, "going public" or "publicly listing" on an OTC-type board gives them fundraising visibility and marketing they could not get as a private company trying to raise cash. There is no requirement to disclose anything to investors as they are not even obligated to disclose anything to be listed. Investors can find them easier instead of the company having to go actively searching for private investors. It also gives them financial credibility because people assume it is on a stock exchange instead of a bulletin board unless directly asked.

However, in the long run, the company may not be ready to be considered a "publicly listed" company in the traditional stock exchange and uninformed investors may lose faith when the company does not do as well as promised when "publicly listed" on the OTC board because they realized the company was more unstable than they first thought. The relationship between the company and its investors may become adversarial and maybe acrimonious and break down, making it more difficult to raise more money when needed. When the company is "publicly listed", it becomes open to public scrutiny by the markets and media. Public bad news may affect the value of the company's valuation thus affecting their stock quotation, regardless whether it is true or not, which will affect the company's ability to raise future funding. It's a bit like being a celebrity and the gossip columns need a good story and will sometimes twist the truth to sell papers. The cost of losing credibility publicly may be more than the public funding is worth even though it may seem easier in the short term. Sometimes it is better to overcome setbacks privately. Neither is wrong or right but there should probably be a balance between the public and private funding.

Companies are not explicit about the difference between where they are listed and/or depend on the ignorance of the investor to not know the difference and not do their research. Most people assume that if a company is "publicly listed" that it must mean it is on a major stock exchange and that it went IPO (initial public offering) to get there and hence, must be more stable than a private company. Both seem to be seen as "going public" and "getting listed" but there is a major difference in what is regulated or not and what is on an exchange versus just being on a board or having its stock price. The former can be traded and the transaction taken care of in-house while the latter transaction is done and finalized off-site away from prying eyes. That is not to say that OTC-type bulletin boards or companies all cannot be trusted. Even Worldcom, Tyco and Enron were publicly listed on major stock exchanges and look what happened to them.

As can be seen, there are other ways to become "publicly listed" that do not require much effort nor meet any stringent qualifying requirements in financial stability. In addition, there are always questions of conflict of interest in the investment world so relationships between entities are important to know about. Of note, when trying to describe all this to a lay person unfamiliar with the investment community, they likened the whole process of selling and buying companies to that of selling on eBay which I thought was quite funny and strangely enough probably not that far from the truth.

Therefore, it is important for the potential investor to do their homework and ask the right questions to be smarter about the changing regulatory laws, the trends in available investment opportunities, company and investor motivations, and how the investment entities and regulatory behaviors are related. It is that understanding before anybody else does that will make and save you money. Jumping on the bandwagon of someone else's understanding will be too late and possibly dangerous and the money will have already been made. Success is not about taking minimal risk but about taking educated and informed risk. Risk is necessary and a fact of life for reward and success. In the end, nothing in this life, including investing, is a sure thing, except for death and taxes…for now…but then again, we stopped light and we never thought we could do that either.

© 2007 Pearl Chin - All rights reserved.

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