Swiss pharmaceutical giant Roche (RHHBY) has a market cap just shy of $250 billion, making it the second-biggest health care company in the world and placing it just behind Wal-Mart (WMT) . And where would an American investor go if they wanted to buy a stake in this company? That would be OTCQX, a marketplace operated by OTC Markets Group Inc. (OTCM) , the New York-based company that operates financial marketplaces for trading 10,000 securities ranging from the tiniest penny stocks to some of the biggest and most prestigious global companies in the world.
R. Cromwell Coulson is the President, Director, and CEO of OTC Markets Group. He spoke with Equities.com about OTC Markets Group, the different marketplaces his company operates, and the types of securities that can be found in each.
EQ: How would you envision your marketplaces sort of fitting into the portfolios of the average investor?
R. Cromwell Coulson:Our biggest product segment is global companies, both ADRs and ordinary shares. That's about two-thirds of our dollar volume and a third of our securities. If you're the average investor and you want to expand your portfolio with companies like Adidas ($ADDYY), Roche, Volkswagen ($VLKAY), we offer some great ADRs and ordinary shares.
Those three are on OTCQX, which is our best marketplace. These are companies that are making their disclosures available in the U.S., they are compliant with federal and state regulations, and they’re easy to buy and sell through your broker. That's really the starting point for investors.
Then another big group is smaller, growth companies. There, an investor needs to be careful. They need to do their own research. They need to look for companies that they think are opportunities.
There are 600-plus community banks on our OTCQB marketplace. There's an opportunity for investors if they look for companies that are near them, that are in their state, and really do their research. Not just buying securities where they're getting an email telling them they should buy them.
And then there's also the companies going through financial restructuring, such as Fannie Mae ($FNMA) and the Freddie Mac ($FMCC), but for those you need to be a very sophisticated investor understanding the legal and financial issues.
EQ: The level of sophistication required for some portions of your marketplaces is pretty considerable. It's clear that you guys are offering access to investments in areas that doesn't necessarily exist anywhere else. Where do you see your marketplaces fitting into the broader market? What do you think the important role that you are playing as a company?
R. Cromwell Coulson:We've got OTCQX which is our best marketplace. It has financial standards. You can’t be a penny stock. That's where we're creating the market for investors who are looking for established companies with information availability. It offers a level of trading transparency and trust. There we have 339 companies; they represent the biggest chunk of our dollar volume. That's our safest market based on the size of the companies and the process they go through.
Then we've got OTCQB, which is our venture stage marketplace. It's a market in transition. So, you have to be reporting to a U.S. government regulator: the SEC, or a banking regulator. But we're adding in some standards. They’re mainly transparency-driven: management certification, and disclosure of major shareholders. That's going to take place over the next 15 months, and we really want to build that into a world-class venture stage market.
And then we have OTC Pink. OTC Pink really exists so brokers can electronically trade all types of securities without involving the company. So there's an opportunity for sophisticated investors, but there's also a risk for unsophisticated investors who don't do their work.
And that’s what's great about OTC Pink is the opportunity. The companies are either disengaged, disconnected, or the markets are distressed. So there's an opportunity if you dig around, but you have to be careful. Because when a company is not connected to its trading market, you can have efficient trading that represents supply and demand but there's not efficient information flows in the company to create efficient price formation.
So, our premium markets – OTCQX and OTCQB – are really making sure that there’s transparency, and investors have the information they need to make decisions. On OTCQX, our best marketplace, there are financial standards, sponsorship by third-parties, and qualitative and quantitative standards. On OTC Pink, there’s always going to be an opportunity, but a risk.
Everybody needs to be their own Warren Buffett. Everybody needs to do their analysis. Meanwhile, we can make it safer for investors by improving the availability and quality of information.
EQ: There's definitely a lot of categorization worked into the markets so that people can, in a general sense, know what they're getting into.
R. Cromwell Coulson:And you see it around the world. Canada has a best marketplace, a venture marketplace, and an open marketplace. Germany has a best marketplace, a middle marketplace, and an open marketplace. Around the world, this is standard.
I think we have a real opportunity, because with OTCQB, our venture stage marketplace, we looked at successful markets in Canada and the UK. We looked at Canada's TSX Venture. We looked at the AIM market in London. Three quarters of the companies on those marketplaces don't qualify for OTCQX financial standards, but they have created great venture markets for investors to discover these early and development stage companies.
EQ: How do you think the JOBS Act will affect your marketplaces? With all the new ways that companies can raise capital, how do you think that's going to change things for OTC Markets Group and where do you guys see yourself fitting in to this new marketplace?
R. Cromwell Coulson: We're already seeing interest from companies that have raised money transparently, privately, and directly in a one-year holding period come to our marketplaces. We expect to see more of that. We also expect to see more when Reg A [the proposed changes to Regulation A under the Jumpstart Our Business Startups (JOBS) Act] comes through. We think our marketplaces are going to be a great place for Reg A securities to trade.
EQ: When you're looking at these smaller growth companies that require an extra level of sophistication from investors, do you have any thoughts on what a prospective investor should be looking for?
R. Cromwell Coulson: They should be looking at value, looking at growth, looking for the credibility of management. What's the track record? And they should not be forgetting what the market cap is, what the company is.
And they should be Googling everybody involved.
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