More than 1,450 companies globally IPOd in 2017 — the busiest for new listings since 2007. Yet while there were the most IPOs in a decade worldwide, U.S. companies, with annual sales of less than $500 million, may believe they are too small to go public. This may be a contributing factor to widely-cited data indicating the number of IPOs in the U.S. has fallen by about half over the past 20 years. There are viable, alternative paths to going public for small- and micro-cap companies without incurring the costs and complexities of the overhyped IPO. While it wasnt without hype and high-expectations, Spotifys direct listing on the New York Stock Exchange shines a spotlight on non-traditional, but reliable approaches to entering the public markets.
The Slow PO
In contrast to the traditional initial public offering (IPO) process and more aligned with Spotifys approach to the public markets, aSlow POon OTC Markets enables companies to enter the public markets by making their previously-restricted shares available for public trading by brokers on the OTCQX Best Market and OTCQB Venture Market.
TheSlow POis similar to a direct listing on an exchange, where a company goes public without raising any funds and doesnt engageunderwriters, as used in a conventional IPO. With music streaming service Spotifysdirect listing,there wasnoroad show;nounderwriters; andnostock lockups for SPOTs shareholders. This was the first direct listing on the NYSE and another sign of major changes in equity capital markets. After two months of trading as a public company, most capital markets professionals agree that the Spotify (NYSE: SPOT) listing was a successful transaction.
With no IPO order book, Spotifys direct listing enabled all investors to buy shares on day one as a public company — leveling the playing field among institutional and retail investors. The direct listing also putno restrictions on SPOTs existing shareholders who wanted to sell shares immediately. Typically, with an IPO, existing shareholders may be restricted from selling for up to six months or longer.
For years, companies have been using the Slow PO path to go public on OTC Markets. Some examples of using thedirect-to-marketroute onOTCQXinclude theBitcoin Investment Trust(OTCQX: GBTC) and numerous community banks around the U.S.
GBTC, which invests exclusively in bitcoin and derives its value solely from the price of bitcoin, is one of the most successful examples of adirect-to-markettransaction. New York-based Grayscale Investments, the sponsor of GBTC, recently launched theEthereum Classic Investment Truston the OTCQX market using a similar offering method.
Community banks have also used thedirect-to-marketprocess to go from private to publicly-traded. The community banks achieve their goals of using their company shares to make acquisitions of competitors, expand their investor base, and provide liquidity for shareholders. There are 75 community banks currently trading on the OTCQX market.
Spotifyhas turned on the spotlightand shone it on the path less taken–there are alternative roads to going public in the U.S. For entrepreneurs and startups, there are multiple options available includingspecial purpose acquisition companies(SPACs),Regulation A+ offerings, anddirect-to-marketofferingsvia the Slow PO. Depending on the needs of the company and its business size, there are ways for many companies to go public without a traditional IPO.
In fact direct-to-market Slow POs have been taking place for nearly a decade. In2010,OTC Markets Groupcompleted a direct-to-market with its own company stock. Shares ofOTC Markets Grouptrade on theOTCQX marketunder the symbol OTCM.
An IPO used to be the ultimate goal and gold standard for startups and entrepreneurs. The bottom line is: there is a high cost to completing an IPO on an exchange, combined with declining investment bank appetite for small-cap IPOs. This is forcing many small- and micro-cap companies to stay private longer and delay going public for 10 or more years.
Fortunately, an IPO isnt the only method for small- or micro-cap companies to gain the benefits of being publicly-traded. For a company with revenues of $500 million or less, OTC Markets offers an efficient, cost-effective option to becoming publicly-traded in the U.S. This enables a company to both provide company investors and employees with a public market to sell shares as well as to grow its U.S. investor base.
One of the most important decisions a company makes when it goes public is where to trade its shares. While many small-cap companies automatically think to list their shares on Nasdaq, the top two OTC Market tiers – the OTCQX and OTCQB- offer the benefits of a stock exchange in terms of liquidity, transparency and investor visibility at less than half the cost. The OTCQB Venture Market is uniquely-designed for development-stage companies looking for a public market.
OTC Markets Group believes a companys growth stage is a key factor in selecting the right market on which to trade shares. The OTCQX Best Market may work well as either a long-term trading market or the first-step in going public.
While an IPO is a costly consideration for every issuer, the benefits of going public are available to solid companies of every size, scale and strategy. Public stock markets offer tremendous benefits for small- and micro-cap companies seeking to raise capital, grow their businesses, and provide their investors with liquidity for their shares. Until recent years, small-caps have been effectively shut out of the IPO market due to rising costs and a lack of institutional support. Alternatives to IPOs, such as thedirect-to-marketSlow PO, can achieve the same result, offering an issuer a less expensive and less regulatory burdensome path to being publicly-traded in the U.S.
Jason Paltrowitz is Executive Vice President of Corporate Services at OTC Markets Group
