OTC Markets Newsletter - August 2011
August 2011

New Marketplace Options for SEC Reporting Companies

Letter from the CEO, R. Cromwell Coulson

The financial press and many industry professionals have noted that the traditional stock exchange model is less and less attractive for smaller U.S. companies. Often, they point to the increased cost of regulation and SEC reporting standards, but they miss two important factors behind this trend.

The first factor is that NASDAQ, once the home and champion of small companies, has focused for the last decade on competing head-to-head with NYSE to list and trade the largest American companies that make up the S&P 500. With that primary goal, NASDAQ’s listing requirements, procedures and process are now virtually identical to NYSE.

The second factor comes from the naturally declining percentage of stock ownership that management teams and directors have as companies grow larger. To solve the agency-principal conflict that such change creates, exchange listing standards are designed to meet the needs of the passive investors (such as huge pension and index funds) that are the majority owners of our country’s biggest corporations. These highly politicized forces continually raise exchange listing requirements by adding increasingly complicated operational controls and governance procedures through committees, consultants and outside directors. The corporate governance processes and requirements for listing on a stock exchange, rather than SEC reporting, are now creating a larger share of the burden for exchange traded companies.

It is no surprise that many dynamic companies no longer find a NASDAQ listing fits their immediate needs. This is especially true in the case of companies with active investors such as entrepreneurs, founding families, private equity, or venture capital firms where management and directors are already aligned with long term shareholder value creation and do not have the need or desire to drown their agile culture with big company organizational structure. Venture capitalists, private equity firms and other active investors have built strong track records of connecting the right management teams with capital and leadership to build some incredible companies without the complication of exchange listing requirements. These active investors are using different approaches to governance that are in some ways delivering superior results to their investors at a lower cost.

Of course, there is still immense value, both for access to capital and investor wealth creation, of having an informed public marketplace to accurately reflect the value of an enterprise and offer an efficient place for shareholders to find liquidity. And, while fewer and fewer small companies are willing to list on a U.S. stock exchange, ironically more and more value in the form of equity is being created by active investors that should have an efficient place to trade as the companies grow.

What these companies with a community of active investors need is an open and transparent marketplace where well informed buyers and sellers can come together to set a fair price. At OTC Markets Group, we are working to provide such a solution.

We have found success with our OTCQX International tier, where global champions such as BASF and Roche are using our platform and their home country disclosure to inform their investors. From our travels, we have observed that there is not a universal model to creating good governance of public companies and high quality disclosure for investors. Many countries have developed unique quality standards that are effective for their largest companies, and different but equally effective structures for their small companies. We are now using some of these ideas to improve the OTCQX U.S. tier, our platform for American companies. OTCQX U.S. includes companies such as Computer Services Inc. (featured in this newsletter), which qualifies by using the Alternative Reporting Standard. OTCQX U.S. is also designed to provide market solutions for SEC reporting companies, and we have recently noticed increased interest from these companies, their advisors and investors as they seek to discover how they can better use our platforms.

OTC Markets interdealer quotation system is home to thousands of companies that file disclosure with the SEC and hundreds that report to a U.S. banking or insurance regulator. Since there is wide diversity among these reporting companies in terms of size, quality, and investor engagement, we offer three efficient alternatives to an exchange listing that are tailored to a company’s individual capital-market needs:

OTCQB
The OTCQB tier is a transparent broker-quoted marketplace for investors and includes the securities of almost 3,700 companies that file current disclosure with a U.S. regulator. Our superior technology for traders has attracted virtually all of the broker-dealer pricing and liquidity from FINRA's telephonic OTC Bulletin Board. However, because of the open nature of OTCQB and the inherent limitations in the SEC review of disclosure, the quality of SEC reporting in this tier is variable. The SEC warns investors on their website that SEC disclosure of “micro-cap” companies (under $300 Million in market capitalization) can be incomplete or false and that investors should be extremely cautious when dealing with unknown SEC reporting companies.

OTCQX U.S. (with Attorney DAD)
Companies that want to better distinguish themselves can access our OTCQX U.S. tier with sponsorship by an Attorney Designated Advisor for Disclosure (DAD). This is an efficient way for companies to demonstrate to investors that they have attained the level of business operations required to meet the financial standards of OTCQX U.S. and are providing investors with high-quality disclosure that has been developed with a skilled advisor. The OTCQX U.S. process is a win for investors as the marketplace should better reflect the value of the company. OTCQX U.S. also protects management and directors, by keeping investors better informed of the prospects and the risks of their investment.

OTCQX U.S. (with Investment Bank DAD)
Many small companies seek a more proactive approach to investor engagement. These companies can use the premium services available from having an Investment Bank DAD sponsor them on OTCQX U.S. An Investment Bank DAD provides companies with a choice of corporate brokerage, advisory, capital raising and other services to best fit their growth needs. Only an investment bank can proactively take a company to market and make sure their story is widely understood by the right group of investors. Investment Bank DAD premium sponsorship makes the OTCQX platform a better option for many small companies that are lost or orphaned on NASDAQ and other exchanges.

OTCQX U.S. is a marketplace for companies with active investors. Officers, employees and directors own, on average, almost 30% of the companies currently traded on OTCQX U.S. When management ownership is not as significant, we usually see a mix of local investors and large outside investors, who are also focused on careful resource allocation and long term value creation.

DADs play an important role as their reputations are tied to the companies they sponsor. This method of requiring a company to be qualified by a knowledgeable professional is successful in many different markets around the world. The DAD process is designed to assure availability of the information required for an intelligent investor to value a security. The ability of the DADs to develop their own requirements for qualifying companies will result in competition and innovation as they serve different segments of the market. Investors will reward the DADs who sponsor companies that perform well with premium reputations.

The growing number of DAD advisors have increased the choices available to publicly traded companies. We look forward to their continued efforts to attract more companies with active investors that want to participate in the growth of their companies. Whether it is a company run by an entrepreneurial founder funded by angels, a venture capital backed management team or a small bank that has raised funds from its community, the DADs will play an important role in creating carefully tailored solutions that improve the capital formation process. Together, we will build a better marketplace for these companies and create new opportunities for investors.

This month's community member - David Simon, Computer Services Inc.Get to Know Your Community:
David Simon, CFO, Computer Services Inc.

This month, we sat down with David Simon, CFO of Computer Services Inc.(CSI) (OTCQX: CSVI). CSI's management team has used the OTCQX U.S. platform and our Alternative Reporting Standard to provide their investors with the information required to build an efficient public trading market. The impressive growth record of CSI management is reflected in the successful doubling of shareholders wealth to reach a market cap of roughly $400 million during one of the most trying economic cycles in recent history. CSI represents a strong example of the companies where management, employees and directors are active investors. These growing companies find the tailored OTCQX U.S. platform a perfect tool for efficiently creating an information-rich marketplace with the disclosure required to attract intelligent investors. We congratulate David and the rest of the CSI management team on their success.

Q: Why has CSI chosen to remain on OTCQX when the Company appears to qualify for both NASDAQ and NYSE?
A: As long as OTCQX provides liquidity for our investors and we can fund our growth initiatives through a combination of internally generated cash flows and borrowing capacity, we don’t see much upside to moving to a stock exchange.

Q: CSI follows our Alternative Reporting Standard on OTCQX. Do you feel your investors are getting adequate disclosure using this reporting process?
A:Yes, absolutely. I challenge anyone who reviews the information we provide at www.otcmarkets.com to find anything that is missing that would be required for an investor to make a wholly informed decision about CSI. But also importantly, the Alternative Reporting Standard gives us as an issuer flexibility to tailor our disclosures to the CSI facts and does not force us to create new facts merely to satisfy requirements written by regulators.
To read the entire interview, click here: www.otcmarkets.com/content/doc/OTCNewsletter/CommunityAugust2011.pdf.

OTC Market Trade Summary - July 2011

OTC Market Tier # Securities* Monthly $ Volume Avg. Monthly $ Volume
per Security
Market Capitalization
(in Millions)*
OTCQX®: The Quality-Controlled Marketplace 246 $1,442,578,516 $5,864,140 $1,162,479
OTCQB®: The U.S. Reporting Marketplace 3,716 $2,324,256,479 $625,473 $1,119,300
OTC Pink:The Speculative Trading Marketplace - Current 2,043 $6,102,803,816 $2,987,178 $12,560,972
OTC Pink Limited Information 723 $698,823,455 $966,561 $41,620
OTC Pink No Information 3,355 $181,100,805 $53,979 $177,054
Totals 10,083 $10,749,563,070 $1,066,108 $15,061,428
* Selected data as of July 29, 2011.

OTC Market Regulation

Market Orders in OTC Equity Securities Subject to Manning Rule - Effective September 12, 2011
FINRA Rule 5320 (“Prohibition Against Trading Ahead of Customer Order”) will be effective on September 12, 2011. FINRA Rule 5320 generally provides that a broker-dealer firm that accepts and holds an order in an OTC equity security from its own customer or a customer of another broker-dealer without immediately executing the order is prohibited from trading that security on the same side of the market for its own account at a price that would satisfy the customer order. Implementation of this rule will make market orders in OTC equity securities subject to the Manning Rule. Limit Orders in OTC equity securities have been subject to the Manning Rule since November 11, 2008.

Read the full Regulatory Notice here: www.finra.org/Industry/Regulation/Notices/2011/P123670

OTC News

"Finding Good DADs" - Securities Technology Monitor


OTC Events

OTC Markets Group has attended or will be participating in the following events to educate investors, broker-dealers, and OTC companies about our marketplace.

Schulte Roth & Zabel - OTC Breakfast (September 14, 2011)

Southern California Investment Conference (August 29, 2011)

The MoneyShow San Francisco (August 10, 2011)

Fact of the Month

OTCQX now trades 520% more than OTCQB and 215% more than OTC Pink in average dollar volume.

OTCQX - New this Month - New this Month

Ten companies joined OTCQX in July, bringing the total number of OTCQX companies to 246 as of July 29, 2011.

 

A complete list of OTCQX companies is available on www.otcqx.com.

OTC Market Tiers

OTCQX
The top tier of the OTC market - for companies that meet the highest financial standards and undergo a qualitative review.

OTCQB
The middle tier of the OTC market - for companies that report to the SEC or a U.S. banking or insurance regulator.

OTC Pink
The speculative trading marketplace where broker-dealers get the best prices for investors.

For questions, please contact OTC Markets Group
www.otcmarkets.com • 212-430-3690 • info@otcmarkets.com
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