Friday, October 29, 2010

New Meaning for OTC/BB

Sometime after the beginning of next year Rodman & Renshaw Capital Group (RODM: Nasdaq), a growing U.S.-based investment banking firm, expects to close its proposed purchase of the Over-The-Counter/Bulletin Board. The OTC/BB, as it is more commonly known, is an interdealer electronic quotation system that offers real-time quotes and last-sale prices on thousands of securities not otherwise listed on national or regional exchanges. It provides access to over 3,300 different securities for broker dealers.

The Rodman bid took some by surprise even though the company’s suggestion that it wants to diversify revenue sources makes sense from a purely business point. The potential conflict in a broker dealer running a major interdealer platform raises eyebrows for some particularly smaller boutique firms trying to capture of bite of the investment banking pie.

No doubt Rodman will provide the usual assurances of transparency and information firewall protection. That said there are a few investment bankers and traders who might be looking “Over-Their-Shoulder/Bravely Braced” for a showdown once the Over-The-Counter/Bulletin Board deal is closed.

The OTC/BB is home to numerous, very small public companies that are often disparagingly referred to as penny stocks. This is because the only requirement to be listed on the OTC/BB is to be current with filing required by the Securities and Exchange Commission. There are no minimum capitalization, no minimum share price or corporate governance hurdles such as those thrown up by the national exchanges. Any company is welcome as long as the SEC animal is fed.

The negative reputation is at least in part unjustified. There are many companies on listed on the OTC/BB which have profitable operations, providing valuable products for their customers and secure jobs for employees. For example, closely held companies with minimal trading history can end up on the OTC/BB despite lengthy operational history simply because its capitalization does not meet criteria set out by the national exchanges.

Perhaps it is this “diamond in the rough” character that Rodman recognized when they made a bid for the OTC/BB. The Financial Industry Regulatory Authority (FINRA), which has been running the OTC/BB decided over a year ago to part with it in order to focus on its regulatory function. Pink OTC Markets, the owner of Pink Quotes (formerly Pink Sheets) was initially thought to be the likely successful suitor. Pink Quotes is a three-tiered interdealer quotation system for unlisted and non-reporting public companies.

Could Rodman as owner of the OTC/BB assets and operator of the platform change the listing rules in order to exert undue influence over the listing status of companies doing business with rival investment banks? Will Rodman investment bankers get early notice on major developments with promising small cap companies that could give them an edge in winning capital or M&A transactions? Would Rodman traders have an advantage on the platform?

The reach down into the smaller company arena has already been fruitful for Rodman. In 2009, a tough year for bankers in all parts, Rodman completed 102 financings, raising $2.5 billion for its clients. The firm is considered the leading PIPE and RD (Private Investment in Public Equity and Regulation D) type transactions, completing 317 deals and raising $5.1 billion in capital for its clients in 2009. The current year is shaping up as highly successful.

Rodman indicates that by the end of 2009, over half of its clients were under $500 million in market capitalization, just the size of company that might end up on the OTC/BB at some time or another. The capture of market share in the micro- and small-cap arena has pitted Rodman against a few of the usual players in the field such as Roth Capital Partners (private), JMP Group, Inc. (JMP: NYSE), Jefferies Group, Inc. (JEF: NYSE), and Lazard Ltd. (LAZ: NYSE). It is these bankers who we expect to learn a new meaning for OTC/BB.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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