Handy lessons from the US on over the counter market

There is need to make listing on bourse less onerous for the small companies.

Going through the US Over the Counter (OTC) markets 2017 review, some key attributes stood out: More than 10,000 securities – over 60 percent of these are small and micro-cap companies – are listed.

North of Sh20 trillion volume was traded and a network of roughly 100 broker-dealers and over 50 market data men are involved. But that was not all, a look on the operational side revealed even far better qualities to appreciate.

Here are a few I believe would be good for us. One, re-locate the Growth and Market Segment (GEMs) to an OTC platform. By hosting the GEMs equivalent known as the OTCQB (best segment for start-ups and new ventures) on an OTC platform (not an exchange platform), young businesses benefit from an Alternative Reporting Standard, which is far less costly and less burdensome—no need of a sponsoring NOMAD, no need to register SEC (read CMA) and financial disclosures need not meet exchange-grade reporting standards.

More importantly for investors, whenever GEMs fall short of the standards, it’s simply downgraded to a lower-tier board (PINK Sheets) and vice-versa – de-listings and share suspensions are less favoured.

In my view, these are probably the best conditions for the approximately eight million micro, small and mid-sized enterprises (MSMEs) in the country needing visibility, time and cost-efficient financing with less compliance burdens.

Two, widen the marker system – method categorising companies with specific words and/or letters passing certain information to the market. Cum-Div and Ex-Div are good examples.

Current system can be broadened to cover issuers going through financial stress, mergers and take-overs, facing bankruptcy et cetera, in order to reduce the regulators intervention. For instance, companies whose stock is the subject of a public interest concern can be flagged “caveat emptor” or buyer beware.

Within the PINK Sheets platform, a system based on sufficiency and timeliness of the information they provide to investors is used. “pink current information,” “pink limited information,” or “pink no information,” are its three main categories. No need for regulatory action.

Three, introduce a single-source of issuer data. Through its web-based portal, OTC Disclosure & News Service, public companies can post their financial reports, new releases, videos and investor presentations.

The portal not only helps demonstrate compliance with the securities laws, it has allowed these firms to simplify and efficiently (cuts on their disclosure costs) communicate with the market.

Replicating such a move locally will be a much-needed relief considering many Nairobi Securities Exchange-listed companies score poorly on the investor relations front.

Although being a second-tier market in the US, there are plenty of lessons to learn from the OTC market. Yes, it’s not your AAA debt market or the NSE 15 blue chip segment but there are good reasons to borrow a leaf.

Over 6,000 small and micro-cap companies trade on its platform, 400 new OTC securities were added last year, 261 companies upgraded from pink to OTCQB in the same year, 938 companies were listed on its GEMS equivalent et cetera.

Perhaps, all or just one holds the key to glory. Let’s be open to explore. We all benefit from a vibrant market.