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A Paradigm Shift is About to Occur for School Security in the US – by Ronald Woessner

A paradigm shift is about to occur for protecting America’s school children in the classroom.  And virtually no one has seen it yet.

The paradigm shift will occur because of the confluence of three events.

Paradigm Influencing Event #1

The Indiana Sheriff’s Association has adopted “best practices” for school security.  The best practices are:

  • Instantaneous threat notification to law enforcement of a shooting or a threat
  • Make the classroom a “protected space” with hardened doors and other protections
  • Enable law enforcement visually to locate and track a shooter inside the school and see the shooter’s weapons platform – officers arrive on scene with “up to the second” situational intel
  • Enable law enforcement to launch countermeasures against the attack while officers are en-route
  • Enable classrooms to report their status (safe, injured, under threat, etc.) to law enforcement
  • Provide law enforcement full command and control of an incident by providing 100% actionable intelligence of the situation in the school.

The Indiana Sheriff’s Association video at this link shows how implementing these best practices will save children’s lives.

An attacker can kill and wound children within minutes of entering the school  — well before any law enforcement officer arrives on scene.  This reality is addressed by the Indiana Sheriffs’ Best Practices:

  • Hardened classroom doors and countermeasures slow the attack and limit casualties while officers are en-route
  • Instantaneous threat notification to law enforcement and providing law enforcement real-time intel as to where the shooter is within the school reduce officer response times

Reduced response times = fewer casualties.

The Indiana Sheriffs’ Best Practices reduce law enforcement response times from the 9 – 10 minute conventional response time to a 4 – 5 minute best practice response time, as illuminated in the graphs below.

 

Paradigm Influencing Event #2

The Indiana Sheriffs’ Best Practices are not the typical dry and obtuse ideas buried on page 95 of a 300 page study commissioned by the government, often read and rarely acted on.  Rather, they are actionable practices already  being implemented at the “Safest School in America” located in Shelbyville, Indiana as shown in this “NBC Nightly News with Lester Holt” episode here.

These best practices already being implemented at the “Safest School in America” are at the heart of the raging national debate regarding school security. They came into national view through the testimony of Max Schacter, whose son Alex was killed in the 2018 Parkland, Florida shooting.

Mr. Schacter has emerged as a leader of the Parkland families and has committed himself to establishing national standards for school safety through the “Safe Schools for Alex Foundation.”

Mr. Schacter testified in August 2018 before the Federal School Safety Commission, where he spoke of visiting Indiana’s “Safest School in America.” He stated that our “soft target” schools need to be “hardened,” like airports and federal buildings, with the protections implemented in the “Safest School in America,” in conformance with the Indiana Sheriffs’ Best Practices. Excerpts of his testimony appear below:

“If the door to Alex’s classroom had ballistic-hardened glass, he would still be alive today,” Schacter said during the meeting. After the shooting, he said, he traveled the country to see what other schools were doing to protect students, and the Indiana school stood out. “In the 19 years since the Columbine tragedy, we have focused most of our efforts on mental health and prevention. School hardening has been at the bottom of the list. Visiting that school in Indiana convinced me that it is time to bring hardening up to the top.”

More of Mr. Schacter’s testimony can be found here.

Paradigm Influencing Event #3

Event #3 is perhaps the most important paradigm influencing event because it reveals how school security systems can be paid for, i.e., where’s the money coming from for school security?  Most school district budgets simply do not have the capacity to pay for school security systems.  In fact, many teachers  routinely use personal funds to purchase school supplies for the children in their classrooms.  Finding substantial monies in state legislative budgets for annually-recurring expenses for school security measures is equally problematic as well.

To solve the funding issue, the State of Indiana has conceived and is acting on an idea that can provide ample funds for school districts to implement the Indiana Sheriffs’ Best Practices.

Legislation has been introduced in the Indiana State Senate that will give Indiana school districts the authority to conduct a referendum whereby the voters in the school district can vote to impose a dedicated property tax to fund school security systems in their school district.  The legislation, SB 127, introduced by Senator Travis Holdman, is expected to be approved and become law this year.  If approved, the legislation would enable Indiana voters to allocate up to $150M annually to provide safer schools for Indiana public school children.

By looking to property tax revenues, SB 127 recognizes and acknowledges that school “hardening” security measures should be viewed and funded as a school infrastructure cost similar to the cost of fire suppression equipment.

In sum, the paradigm shift will result from the confluence of the following three events:

  1. The Indiana Sheriffs have adopted best practices for school security systems.
  2. These best practices are already implemented in the “Safest School in America.”
  3. Following enactment of the Indiana legislation, Indiana parents will vote a tax to pay for school security systems to protect their children in conformance with the Indiana Sheriffs’ best practices for school security systems.

Other states will follow once Indiana moves forward,  This paradigm shift is about to occur.  Wait and see.

© Ronald A. Woessner

January 19, 2019

Mr. Woessner has worked in the smaller-cap company ecosphere for 25+ years in the capacity of General Counsel to two NASDAQ-listed companies and CEO of an OTC-traded company that he up-listed to NASDAQ.  He currently mentors and advises companies in the start-up and smaller-cap company ecosphere and helps them raise capital through Regulation CF crowdfunding and otherwise. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. Mr. Woessner, a certified Toastmaster, speaks and writes about US public and private capital markets topics and his articles are published at equities.com and elsewhere. For more information on Mr. Woessner’s background or to contact him about a speaking engagement, see https://www.linkedin.com/in/ronald-woessner-3645041a/.

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Smaller-Cap Companies: Beware the Short Seller! – reprinted by Ronald Woessner

 This is a reprint of an article of mine originally published by equities.com at the link here.

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Ronald Woessner   | 

Smaller-cap companies with thinly-traded stocks need to beware the short seller.  

This article illuminates how smaller-cap companies (particularly OTC-traded companies) are getting the “short end of the stick”[1] due to inadequate legal protections against abusive short-selling practices.Investors can either participate in the market by going “long” a stock or by going “short” a stock. Investors that are “long” a stock believe it will increase in value. Investors that are “short” a stock believe it will decrease in value.A short sale occurs when an investor sells a security the investor does not own. If the price of the security drops, the short seller buys the security at the lower price and makes a profit.[2]A sudden influx of short sales in a thinly-traded stock can cause an immediate and material decrease in the stock price. This results from the temporary imbalance between sales and purchases.[3]

The SEC and the courts have said there is nothing inherently wrong with short sales because short selling contributes to price efficiency and market liquidity. For example, in a 2014 short selling study, the SEC noted, “Short selling as employed by a variety of market participants can contribute substantially to overall market quality through its positive effects on price efficiency and market liquidity.”

While short selling, even in large volumes, is not inherently illegal, the following is illegal:

  • “Naked” short selling: This occurs when the short seller sells short but does not borrow the stock sold short or make arrangements to borrow the stock before the sale. SEC regulations require the short seller’s broker, prior to executing a short sale, to either borrow the security being sold, enter into a bona-fide arrangement to borrow the security, or have reasonable grounds to believe that the security can be borrowed so that it can be delivered to the buyer’s broker within the required two day (“T + 2”) settlement period.
  • “Short and distort” campaigns: This occurs when a stock manipulator shorts the stock of a particular company, then spreads false or unverified rumors about the company for the purpose of driving down its stock price. Once the stock price has fallen on these rumors, the stock manipulator purchases shares at the lower price to cover the manipulator’s short position and pockets the profit. Given the speed with which information (including false information) moves throughout the investment community via social media channels, these short and distort campaigns can gather momentum very quickly and cause material downward spikes in an issuer’s stock price within a short period of time during one day.

Those of us that operate in the public company ecosphere are grateful that the law protects issuers against the two abusive short-seller tactics noted above. We are relying on the SEC to be vigilant in monitoring for these abuses and aggressively move to stamp them out. Notwithstanding, there are at least four “gaps” where the law does not adequately protect issuers, as discussed below.

Gap No. 1: No Required Disclosure of Short Position

There is no public reporting requirement for investors who go “short” a company’s stock. In contrast, there are extensive public disclosure obligations for investors who go “long” a company’s stock. For example, Section 13(d) of the Securities Exchange Act of 1934 and the regulations thereunder require persons owning more than 5% of the outstanding stock of a ’34 Exchange Act listed company to report their stock ownership with the SEC.

NASDAQ recognizes that not requiring public disclosure of short positions is poor public policy, according to Mr. Edward S. Knight, chief legal officer for NASDAQ. In his testimony before the Capital Markets Subcommittee of the House Financial Services Committee in May 2018, Mr. Knight testified that there is material harm to the efficacy of the public markets without short position disclosures. He made the following specific points:

  • Short sellers can amass short positions secretly
  • This is “untenable” since short sellers have in recent years taken an activist role in corporate policy and governance
  • Because short sellers are not required to disclose their short position, neither the public nor companies know that the short seller may have a “hidden agenda” with respect to the activist positions it is pushing
  • Lack of information regarding short positions is detrimental to market efficiency

Biotech companies are particularly vulnerable to manipulative short-selling practices, according to testimony the same day, also before the Capital Markets Subcommittee, by Mr. Brian Hahn, chief financial officer of the bio-tech firm GlycoMimetics, Inc. Mr. Hahn testified on behalf of the Biotechnology Innovation Organization, a trade association for biotech companies. According to Mr. Hahn’s testimony:

  • Biotech companies often face attack by short sellers who spread online rumors or publish false or misleading data about clinical trials
  • Short sellers use the auspices of the US Patent and Trademark Office (“USPTO”) to drive biotech company stock prices down. After shorting a company’s stock, the short sellers then file spurious patent challenges through the USPTO. The company’s stock price is driven down as false rumors spread that the company’s patents may be in jeopardy.

In sum, these commentators (and our common sense) informs that short sale position disclosures would shine a “light” on short seller stock manipulation. Moreover, if short sale positions were disclosed, the SEC will know the identities of those who are potentially benefiting from stock price declines linked to false rumors and other manipulative behavior — and can start their investigation with those folks!

Gap No. 2: Holders of Convertible Notes Are Permitted to Short Prior to Note Conversion

Holders of convertible promissory notes are legally permitted to short the stock of the company that issued the convertible note and thereby drive the stock price down and receive more shares pursuant to the note conversion.

Here is a typical scenario where this could occur: a company issues a convertible promissory note to evidence a loan. Amounts owing under the note may be converted into the company’s common stock at the noteholder’s discretion. The conversion price is typically at a discount (often 15-20%) to the then-current trading price of the company’s common stock. (Convertible notes issued by OTC-traded companies often have “floorless” convert provisions, meaning there is no “floor price” that limits how low the conversion price can go. Floorless convert provisions are not permitted under NASDAQ rules for NASDAQ-traded companies.)

The convertible note holder could then legally short the company’s stock to drive the share price down. The note holder then coverts the note at the lower share price and receives more shares in the conversion.[4] While many CEOs and CFOs are shocked to learn that this abusive and manipulative tactic is legal — indeed it is! See the case of ATSI Communications Fund, Ltd. (2d Cir. 2009), where shorting prior to note conversions was alleged to have occurred. The court said it was perfectly legal for the convertible note holder to short the company’s stock prior to initiating a note conversion. The court stated, “Purchasing a floorless convertible security is not, by itself or when coupled with short selling, inherently manipulative.” (emphasis added.)

PRACTICE TIP: The above discussion should not be interpreted as suggesting that every convertible note holder will engage in this abusive, manipulative behavior. Nevertheless, as CEO or CFO it is prudent to attempt to protect your company against this manipulation by ensuring that the definitive agreements prohibit this behavior.

Gap No. 3: Short Selling Prior to Purchasing Shares in a PIPE

A “PIPE” is a Wall Street acronym for Private Issuance of Public Equity, meaning a transaction whereby a publicly-traded company issues shares in a private offering, typically via Regulation D.

The SEC short selling rules permit an investor who is purchasing stock in a PIPE transaction to short the issuer’s shares before purchasing the issuer’s shares in the transaction. The short seller/PIPE investor then uses the shares it purchased in the PIPE (which shares are typically priced at a 5% – 20% discount to the market price) to cover its short position!

Here is a typical scenario where this could occur: An issuer hires an investment banking firm to help the issuer raise $X by selling shares of its common stock in a PIPE transaction. The shares in the transaction will typically be sold at a 5-20% discount to the share market price on the day the deal closes.[5]

The investment banking firm approaches a number of potential investors to determine if they are interested in investing in the PIPE transaction. (This is considered “soliciting indications of interest” in Wall Street jargon.) Once indications of interest for the $X sought to be raised have been collected, the deal is “priced” and closed (i.e., the discounted price at which the company’s shares are to be sold is determined), the definitive agreements are signed, and the deal closes.

During the period between learning of the PIPE and the deal closing, an investor is legally permitted to short the issuer’s stock and then use the discounted shares it acquires in the PIPE to cover its short position. For example, if the market price of the issuer’s stock is $10 per share and the PIPE discount is 20%, the investor will be entitled to purchase the issuer’s shares at $8 per share. The investor legally could sell the issuer’s shares at the market price of $10 per share and then cover its short position using the $8 shares purchased in the PIPE transaction. The investor realizes a $2 gain per share in an apparently legal, riskless transaction.

The SEC has pursued legal claims, with limited success, against investors who have engaged in this manipulative behavior. See the May 2014 article, “SEC Enforcement in the PIPE Market: Actions and Consequences” in the Journal of Banking and Finance for more information on this topic.

Again, many readers — not surprisingly — are shocked to learn that this abusive and manipulative tactic is apparently legal.

PRACTICE TIP: The above discussion should not be interpreted as suggesting that every PIPE investor will engage in this abusive, manipulative behavior. Nevertheless, as CEO or CFO it is prudent to attempt to protect your company against this manipulation by ensuring that the definitive agreements prohibit this behavior.

Gap No. 4: The “Alternative Uptick Rule” Does Not Protect OTC Companies from Bear Raids

SEC Rule 201 (the “alternative uptick rule”) restricts short sellers from driving down the price of shares of NYSE- and NASDAQ-listed companies whose shares have experienced a price decline of 10% or more in one day. Once this “circuit breaker” price decline occurs, short sale orders for the remainder of the day and the following day must occur at a price above the current national best bid, subject to certain exceptions.

The purpose and effect of the Rule is to protect the company from short-seller attack by impeding a short seller’s ability to drive down the price of a stock that has experienced such a one-day price decline.

The Rule does not protect OTC-traded companies. This makes them vulnerable to “bear raids,” where a gang of short sellers collaborate and sell short shares of a particular company in an effort to drive down the price of the shares by creating a temporary imbalance of sellers versus buyers or creating the perception that the share price is falling for fundamental reasons. These “bears” then cover their short positions by purchasing the company shares at the manipulated, lower price and pocketing the gain between the higher price at which they sold the shares and the lower price at which they purchased the shares back.

In sum:

  • Smaller-cap companies with thinly-traded stocks, particularly OTC companies and biotech companies, are especially vulnerable to “bear attacks” and stock manipulation from short sellers because of these legal “gaps.”
  • Gaps 2 and 3 are disproportionately harmful to smaller-cap OTC companies because PIPE and convertible note financings are common sources of financings for OTC-traded companies.

Bottom line: CEOs and CFOs — be wary of short sellers!

©Ronald A. Woessner

January 9, 2019

Mr. Woessner mentors and advises companies in the start-up and smaller-cap company ecosphere and helps them raise capital. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. For more information on Mr. Woessner’s background, see https://www.linkedin.com/in/ronald-woessner-3645041a/.

[1] To get the “short end of the stick” is getting the bad end of a deal or receiving the least desirable outcome from something. The origin of the phrase dates back to the 1500s and appears to be a reference to carrying loads mounted on rods (sticks). When carrying a load, the person who has the shorter end of the supporting rods carries more of the load and, hence, they are getting the worst aspect of the situation.

[2] If the price of the security increases, the investor loses money. The higher the price goes, the more money the investor loses.

[3] It’s more difficult to drive down the price of liquid stocks by short selling because there is more order depth (demand) on the buy-side to absorb the short sales. The more liquid the stock, the more shares required to be sold short to create a material price drop. The more illiquid the stock, the fewer shares required to be sold short to create a material price drop.

[4] Some have asked me why it would benefit a convertible note holder to obtain more shares at a lower stock price. The answer is that the lower stock price caused by the short selling is typically temporary, having been caused by an artificial imbalance between sales and purchases caused by the influx of the suddenly-introduced short sales. Once the normal equilibrium between purchases and sales is re-established, the stock price typically rebounds.

[5] The share purchase price is at a discount to the market price because the shares being issued are “restricted” and cannot be sold until the earlier of six months after purchase or such time as they are publicly registered for resale with the SEC.

 

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More Bad News for US Smaller-Cap US Companies if MiFID II Reaches US — republished by Ronald Woessner

Readers — an earlier article of mine published by equities. com at this link discussed how smaller-cap US public companies are being hurt by not having research investment analysts covering their stock.  As bad as the lack of investment analyst coverage is now for smaller-cap companies (and it is REALLY bad), matters will get MUCH worse if the European MiFID II is adopted in the US.

According to the Bloomberg article below, which originally appeared at this link, the European MiFID II directive has decimated the European investment analyst ranks.  If adopted in the US, it would have an equally decimating effect on the US investment analyst community and create an even worse circumstance for US smaller-cap companies! +++++++++++++++++++++++++++++++++++++++++++++++++

Research Analysts’ Existential Crisis Enters MiFID II Era

By

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  • Analyst headcount falls as EU rules put price on research
  •  Merian’s Buxton says quality of research is deteriorating

Predictably, by putting a price tag on research, the European Union rules have made asset managers more selective about what they need, especially since most have opted to swallow research costs rather than pass them to clients. Many have also boosted their in-house analysis capabilities.

More Pressure

Consequently, there’s even more pressure now to write reports with concrete conclusions, rather than trimming estimates by 3 percent on a stock rated “hold,” said an analyst who manages a team and asked not to be identified discussing internal matters. Another analyst who also requested anonymity said calls on a stock are now more important than long-term thematic pieces. Anthony Codling, an analyst at Jefferies LLC who quit recently, said he reduced the amount of what he deemed “maintenance research.”

“Why would a client pay to receive a note that says results are in line?” he said.

Those concrete conclusions are sometimes drawing rebuttals from companies. U.K. real estate services company Purplebricks Group Plc in February disputedCodling’s analysis of its accounting, while lab-testing company Eurofins Scientific SE said “factually wrong estimates” from Morgan Stanley’s Edward Stanley may have misled or confused investors. French grocer Casino Guichard-Perrachon SA contested research by Bernstein’s Monteyne.

Of course, many analysts would say research always should have had demonstrable value, even before MiFID II; what’s new is the intensifying competition for payments. But some lament that a new model that measures clicks and analyst interactions by the hour ignores the subjective quality of analysis.

While there have been murmurs about a supposed sensationalist turn in investment research, the caliber of analysts also is declining, meaning that one still sees meaningless reports, said Richard Buxton, chief executive officer of fund manager Merian Global Investors — such as when a brokerage says the outlook for the mining sector is increasingly a macro call.

Shrinking Coverage

“The quantum of coverage is shrinking, the quality of coverage is definitely shrinking, and it’s no surprise therefore that we are continuing to pay less and less for the research,” he said from London. “We know good people are leaving the sell side, and that has to be a consequence of [the fact that under] MiFID II people are not going to earn the same amount of money as they used to as a research analyst.”

Headcount for equity research at 12 major investment banks has declined 14 percent since 2013 to 1,200 as of the first half of 2018 in Europe, the Middle East and Africa, data from Coalition Development Ltd. show. Over the same period, the number of ratings on companies in the Stoxx Europe 600 Index has dropped 9 percent while the number on the Stoxx European small-cap index has fallen 12 percent, according to data compiled by Bloomberg.

To Robert Miller, head of research at Redburn, the biggest risk to the industry is the attrition of talent.

Talent Pool

“Because of the deflation in the industry, the risk is that the best talent decides that they really need to work on the buy side or in the industry or do something completely different,” he said. “The pool of high-quality, experienced talent in my industry is shrinking.”

The industry is seeing more mergers as revenue falls. AllianceBernstein Holding LP, the asset manager that owns Sanford Bernstein, agreed in November to buy Autonomous Research, which specializes in financial stocks. Germany’s MainFirst Holding AG last month took over Raymond James Financial Inc.’s institutional brokerage business in European stocks. U.S. securities firm Stifel Financial Corp., in turn, is buying MainFirst’s equity research and brokerage operations.

Research houses are also exploring new sources of revenue. More are now charging companies for reports about them — a “sponsored research” model that has spurred worries of conflicts of interest. Some firms say companies are paying larger retainers for brokerage services including research. One, French firm AlphaValue SA, is asking investors to “crowdfund” analyst reports.

Metrics-Driven

Regardless, investment research — an area of finance that can seem almost academic at times — is becoming more metrics-driven. Many banks now charge explicitly for meetings and calls with analysts, making investors more selective about such conversations. These interactions are now recorded for compliance, with their value scored by the user.

“The battleground is interaction between research analysts and the buy side, who are increasingly adopting the accountant or legal industries’ ‘gas meter’ model of by-hour pricing,” said Ed Allchin, head of sales and business development at Autonomous Research in London. “This has made fund managers more reluctant to contact analysts because they may be charged each time, with thought going in to the economics of that call or meeting.”

Gone are the days when investors would meet with analysts casually just because they happen to be in the area. There are now fewer ad-hoc meetings and more that are focused on specific subjects, said Redburn’s Miller, even though the research firm doesn’t charge by the hour. The number of calls fell at the start of the year, but has since recovered, said Bernstein’s Monteyne.

Still, the realities differ for different research providers. Large investment banks can afford to sell analysis at lower prices, since it’s just one part of a large business. Independent research houses do not have that advantage but can tout their conflict-free specialization. The jury is still out on who will ultimately emerge victorious, but increasingly the worry is that the smaller players will drown.

Market Impact

For investors, the concern is that shrinking analyst coverage, especially in small- and mid-caps, will make the market less efficient, with lower liquidity, though some say that could help active stock pickers. Already smaller companies are feeling the pressure to beef up investor relations resources, as they can no longer count on analysts alone to tell their story.

The rules may be amended. European regulators are studying their impact, including on smaller stocks and independent research providers. U.K. regulators will step up scrutiny of falling pricing models and research budgeting, while elsewhere in Europe, rules may be softened to lessen the blow on smaller companies, Bloomberg Intelligence said in a note on Thursday.

But little is likely to reverse the existential crisis in research. For an industry that thrives on dissecting numbers and predicting winners and losers, it makes sense that its value and future should now determined by market forces.

“Investment research is a declining industry given the cost pressures,” said Ian Harnett, who left UBS in 2006 to start macro analysis firm Absolute Strategy Research Ltd. “If you survive through that process than maybe there is an opportunity to increase your market share. What we do not know is what the value of that market share will be in three years’ time.”

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Mr. Woessner  mentors, advises, and helps companies in the start-up and smaller-cap company ecosphere raise capital.   He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. See here for more information on Mr. Woessner’s background.

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Increasing Your Company’s Stock Trading Liquidity with IR Firms — reprinted by Ronald Woessner

 This is a reprint of an article originally published by equities.com at the link here.

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Ronald Woessner   | 

This article explains how smaller-cap companies with illiquid stocks can create sustained, significant trading volumes with investor relations (“IR”) firms, thus enabling them to attract investment firm capital and investment analysts. Sustained, significant trading volumes are necessary to attract investment firm capital and investment analyst coverage, as illuminated in earlier articles of mine.[1]

CEOs of smaller-cap companies with illiquid stock trading volumes often ask me, “How do I create sustained, significant[2] trading volume in my company’s stock?”

The answer is simple.  The company needs to attract Main Street (retail) investors, rather than Wall Street (investment firm) investors.  When enough retail investors begin buying and selling a company’s stock, the trading volume will increase to a sufficient level such that an investment firm will consider making an investment in the company.[3]

Attracting retail investors typically requires your company to hire an IR firm to perform “market awareness” activities, i.e., efforts directed to informing potential Main Street investors of the opportunity to purchase the company’s stock through the open market.

Company CEOs also often ask me: “Why is it necessary to hire an IR firm to get “more eyes” on my company’s stock; isn’t producing excellent financial results, or having a unique product, or having a compelling business model, or having a huge market opportunity, etc. – isn’t that enough to attract Main Street investors?”

The answer is … “No – that’s typically not enough. Sorry.”

Think of it this way. There are approximately 15,000 publicly-traded companies in the US, including those traded through the over-the-counter (OTC) market.  Common sense suggests that the average Main Street retail investor is NOT going to find your company’s stock from among these 15,000 companies without your company implementing targeted, effective initiatives to “market” your stock to retail investors.

Of course, there are companies that do not have to implement stock marketing campaigns to attract retail investors: some CEOs are well-known and have a public following, or the company otherwise has become known to the investing public, or the company is in a “hot” investment sector (biotechnology, cannabis, etc.).  The reality of the capital markets is this:  a company that does not fall into these categories must implement targeted, effective initiatives to “market” its stock to Main Street investors and motivate them to purchase the company’s shares through the open market in order to achieve sustained stock trading liquidity.  Period. Paragraph. End of discussion.

The next questions invariably are:  “What exactly do investor relations firms do, anyway?” and “What initiatives are effective in marketing an illiquid company stock to Main Street investors to create sustained, significant stock trading liquidity?”

The services performed by investor relations firms often vary from firm-to-firm.  The services typically performed by investor relations firms appear below:  some firms perform all of these tasks, while some perform only a few.

  1. Designing that portion of the company’s web site that is directed toward investors. (That portion typically resides under a tab named “Investors Relations.”)
  2. Writing the script for investor conference calls.
  3. Introducing the company to potential investors via one-on-one meetings or via group meetings at breakfasts, luncheons, etc.
  4. Sending the company’s press releases to the IR firm’s “proprietary” distribution list of potential investors.
  5. Phoning potential retail investors and asking them if they would be interested in receiving information about the company.
  6. Implementing social media and digital campaigns about the company directed to retail investors.
  7. Drafting company press releases.
  8. Securing articles about the company in newspapers, magazines, online venues, or securing television or media interviews.
  9. Introducing the company to high-net worth individuals.
  10. Introducing the company to investment firms (including, so-called “family offices”).

One IR firm may NOT actually offer all of the above services. In fact, your company may not need all of these services. It is remarkable how often it turns out that a particular IR firm that is heavily courting your company does not provide the services your company actually needs. Hence, as the CEO or CFO — you need to be thoughtful about which of these services your company actually needs and compare that list to the services the firm actually provides.

The next question for examination is:  which of the services above are actually effective in bringing your company to the attention of retail investors who might actually purchase your company’s shares through the open market?  Be aware that IR firms typically do not work on a contingency basis and expect to be paid a monthly cash retainer (and perhaps an additional equity “kicker”); hence, you will want tangible and measurable value from hiring an IR firm.

Different people have different views of the efficacy of the services noted above in increasing sustained, significant stock trading liquidity. See below for my opinion as to which of the aforementioned services are effective at creating sustained, significant stock trading liquidity for a currently illiquid company stock:

  1. No.
  2. No.
  3. No — unless the company convenes such meetings with hundreds of potential retail investors and has effective phone follow-up.
  4. Unlikely.
  5. Yes, if enough potential retail investors are contacted.
  6. Yes.
  7. No.
  8. This is a good start – an article in USA Today obviously is more valuable than an article in the local newspaper and an appearance on the Fox Business channel is more valuable than an appearance on local news.
  9. Typically not, as the high net worth individual typically would not want to invest in the company through the open market because of the stock illiquidity, although the introduction might result in a direct capital investment or the investor might prefer to wait until the company has sustained, significant trading volume.
  10. No — and a special word of CAUTION. As illuminated in one of my earlier articles, investment firms will NOT invest in a company whose shares do not have sufficient trading liquidity. Hence, if your company has insufficient trading liquidity to attract investment firm capital and an IR firm proposes to introduce your company to investment firms (including, “family offices”), your company is either (a) wasting its time/money or (b) the investment firm will be offering you a “toxic” financing (a topic of a future article).

In sum, as a practical matter, a “mosaic” of the “yes” activities are usually necessary to attract retail investors in sufficient quantity to create sustained and sufficient trading volume to attract investment firm capital.  Further, some of the “no” activities have value as well; they simply do not have material value in creating sustained, significant stock trading volumes.

There are dozens of reputable IR firms. Caveat emptor: there are also many more that are disreputable or reputable, but ineffective.

Generating sustained, significant trading volume is a combination of art and science, similar to creating and executing an effective investment “pitch.” What works for one company will not necessarily work for another.

Good luck! Connect with me through Linked In if you have questions.

Up next:  Beware the short-seller attack and “bear raids.”

© Ronald A. Woessner,  December 31, 2018

[1]  See the article here (stock liquidity necessary to attract investment firm capital) and here (stock liquidity necessary to attract investment analyst coverage).

[2] The article here explains how to estimate the trading volume that will be necessary to attract any particular amount of investment firm capital.

[3] An earlier article illuminated that stock trading liquidity is a necessary, but not sufficient condition, for an investment firm to consider making an investment.  In addition to stock liquidity, the company typically must have a compelling business model, large market opportunity, credible management, excellent products, etc.

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Mr. Woessner mentors and advises companies in the start-up and smaller-cap company ecosphere and helps them raise capital.  He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities.  See here for more information on Mr. Woessner’s background.