Yet Another New Market In New York – And This Time It's Pink!

This week sees the announcement of some more apparently great news for the tech NOs – Nasdaq Orphans. Especially for those still in denial about the impossibility of an IPO in the USA. Also known as the Living Dead, the NOs are estimated to number over 300 tech companies that have received over $50m of venture capital and that would have expected to have listed on Nasdaq by now were it not for the Four Horsemen of the Apocalypse. Four unstoppable forces that have successfully prevented the NOs from realising their leaders’ visions. Wikipedia tells us that:

“the four horsemen are traditionally named Pestilence, War, Famine, and Death”

Keen theological students of the Book of Revelation will know that interpretation of the Horsemen’s role is complex and cloaked in controversy. Those more concerned with mammon and keen to vanquish non-abstract, earthly threats will recognise aim4tech’s interpretation of the Four as: • The SEC; • Sarbanes Oxley; • Nasdaq’s inexorable rise up market; and • The Plaintiff’s Bar. And for the last two or three years, the Horsemen have enjoyed the freedom of the plains, diligently carrying out the Devil’s work stifling the IPO plans of any sub-$500m companies that dared to raise their heads. Until March 5th that is, when Pink Sheets LLC commenced trading on its new upmarket version of the old down-market OTC exchange – OTCQX. I must admit that I missed the news when it was issued and I had failed to spot the original Pink Sheet announcement back in March of 2006. I don’t feel too bad about that because, as a trawl of Google’s news archive will show – it didn’t exactly kick up a storm at birth. Nor has it featured in any of the many high profile defences of New York’s capital markets uttered by Big Apple luminaries. But the OTCQX hit the news in London today when, under the headline

“Tate & Lyle lists on US Aim rival”

the FT reported that the venerable British manufacturer of Splenda had decided to list its ADRs on the bit of the OTCQX which is reserved for foreigners – the International PremierQX.

Tate & Lyle joins other high profile names Day Software Holding AG, Globex Mining Enterprises Inc., Pryme Oil & Gas Ltd., Starpharma Holdings Ltd. and Wal-Mart De Mexico S.A.B. de C.V. as the pioneering members of the International PremierQX.

For the record, the domestic pioneers (torch bearers for the Nasdaq Orphans) are: Computer Services, Inc.,(service and software solutions for banks in both a service bureau and an in-house environment) Detrex Corp., (A supplier of cleaners and solvents ) Meritage Hospitality Group, Inc., (the nation’s only publicly traded "Wendy’s Old Fashioned Hamburgers" restaurant franchisee, and is the nation’s first "O’Charley’s" restaurant franchisee) and Moro Corporation,(A leader in infrastructure products and services for the commercial construction industry)

So far, so good, but as ever, reality and perception are separated by a fairly large gulf.

Prima facie, OTCQX is good news for NOs. It offers US tech companies an alternative to AIM without the need to travel or learn another language.

But unfortunately the language of the Pink Sheets is all too familiar to American business leaders.

Never mind the threat of the Four Horsemen – the Pink Sheets have traditionally been that part of the swamp where all manner of nasty things reside.

But don’t just take my word for it - read what Pink Sheets’ Chairman and CEO – Cromwell Coulson – has to say. In today's article the FT asserted that:

“The new platform is an attempt to differentiate better-performing US and foreign companies from the mass of distressed and shell companies which account for about 45 per cent of the 8,000 companies listed on the Pink Sheets.”

Now, call me old fashioned, but if close on half of my customers were described as “ a mass of distressed and shell companies” I would come out fighting.

Mr Coulson’s position is somewhat more circumspect, and I use the term circumspect advisedly. Presumably Tate & Lyle take some comfort from this colorful description – they were until last week listed in the swamp along with the other 8,000 or so other companies proud to be public in the Land of the Free, but I doubt that their reptilian erstwhile colleagues will be as well pleased.

“You drain a swamp by taking out the good stuff. We are creating a place for reputable operating companies to separate themselves from the rest,"

But don’t give up yet! Just because a market’s leader disses his customers doesn’t mean that it’s not a serious place to IPO. After all the whole regulatory framework of the OTCQX is modelled on the one that has been so successful for London’s AIM. To quote Pink Sheets LLC’s own release:

“Based on the NOMAD model of the London Stock Exchange's Alternative Investment Market (AIM) market, the DAD and PAL advisory roles are designed to bolster investor confidence in the quality and availability of issuer disclosure”

DAD and PAL? Yep, I’m afraid so!

DAD = Designated Advisor for Disclosure
PAL = Principal American Liaison

And what do these required advisors do to bolster investor confidence? Well, in an era when all the US’s senior market honchos are emphasising the importance of tight, SOX-like regulation, the scope of the DADs’ and PALs’ jobs is described thus:

The Primary Role of a DAD is to:

• Provide professional guidance to the issuer as they build long- term relationships with managements;
• Help companies discern what information is material to the market and needs to be disclosed to investors; and
• Provide a professional review, not affirmation, of the company's disclosure

Fundamental Responsibilities of the PAL:

• Review that the issuer satisfies the listing prerequisites of the tier for which it applies. In essence, the PAL is simply acknowledging and relying on the work already completed by an international company to list on its primary exchange.
• Act as a liaison between the issuer and the U.S. market. The PAL must have the resources and knowledge base to help the issuer communicate effectively with the U.S. investment community.

But again, just because a market chooses silly names for its regulatory proxies and requires almost nothing of them doesn’t make it a bad thing.

And actually OTCQX isn’t a bad thing – it’s just a thing. In the realm of grown-up capital markets there’s chance that the OTCQX might continue to emulate London’s AIM and become a real market for proper companies with real shareholders – who knows they might even merge with Nasdaq’s PORTAL and do something interesting.

But there are three big reasons why, if I were a tech company leader in 2007 seeking the capital, paper and profile of an IPO I would look elsewhere for a solution:

1. It took AIM over a decade to shrug off its humble roots and to become the global power house that it is today;
2. Even if a vibrant Nasdaq 2.0 emerges in the USA, it will only slay one of the Four Horsemen - the SEC, Sarbanes Oxley and the Plaintiff’s bar will still be there to carry out the Devil’s work.
3. While I dither and wait in the hope that someone - Capitol Hill, the SEC or anyone else, will ride to my rescue, I know that my global competitors aren't sitting on their hands and denying themselves access to the cash, paper and profile that I need to realize my dream.