Mina Mar Group helps micro-cap companies structure their growth. Micro-capitalized companies are those with less than $50,000,000 in equity, sometimes under $1,000,000. Restructuring involves raising money (both debt and stock), and planning how they will eventually harvest that wealth. If you’re a founder or investor, the secret to harvesting your equity is to possess assets with a developed market for their sale; up until recently, that market was the public market. Now, Over-The-Counter Securities (“OTC Securities”) don’t serve that purpose since, unless you’re a tech unicorn doing an IPO, there are essentially no ways to sell the shares you’ve invested in.
OTC securities – how they were deposited five years ago.
Brokerages all around the country have tightened compliance over the past five years to the point where no one may deposit share certificates into their brokerage accounts, even if they can prove that they paid for them. Consider the following demand from a secondary brokerage:
• The shareholder is required to provide all documentation related to the acquisition and ownership of any security (right, this is justified).
• The shareholder is required to provide a tradability opinion prepared by legal counsel from a firm with at least 10 attorneys; this requirement almost certainly results in a price tag of $5,000 or more for the opinion letter.
• Just under 25% of OTC securities and their transfer agents have this capability, so the issuer must be qualified for DTC of the shares into the account.
• The shareholder must have at least $50,000 in blue-chip stocks or cash in the trading account.
For the duration of the three-day settlement period, brokerages were also required to hold a penny ($0.01) for each share of stock sold, even if the price was as low as $0.0001. Due to the fact that FINRA is a self-policing organization made up of the representatives of the large brokerages, which derive the majority of their trading revenue from the OTC markets, we believe this almost ensured that smaller brokerages would not permit account holders to trade in penny stocks, regardless of the parameters. These substantial brokerages had ample capital reserves, rendering that criterion irrelevant.
Several brokerage firms would cooperate with these terms and conditions:
- TD Ameritrade
- E*Trade
- Scottrade
- Charles Schwab – only if you had an account with over $150,000
- Merrill Lynch – if you had a number of other banking accounts with them and a balance
- Interactive Brokers (IB)
- Glendale
- Scottsdale or Alpine (I wouldn’t have recommended them unless it was my final option)
This meant that tiny investors were left stranded with their shares if they owned shares worth less than $25,000, which is actually just another way of saying “Sure Out of Luck.” not able to collect the money they gave to developing groups. Then something amazing happened…
Crowdfunding CF and Regulation A+
Capital formation was made simpler by Regulation CF for crowdfunding and Regulation A+, which gave businesses a simpler route to Securities and Exchange Commission (SEC) mandatory reporting, every six months rather than every three months, and a streamlined format. However, the J.O.B.S. Act didn’t fully address the secondary market, therefore capital harvesting was still only limited (Upgraded Crowdfunding). There are still no secondary markets available despite the fact that many Reg CF platforms, such as StartEngine.com and Microventures.com, have started to offer these. The solution was for a company to advance through capital formation using Regulation CF and then Regulation A+ to obtain a trading symbol that would permit that secondary trading and allow all of those stranded Regulation CF and Regulation A+ investors to harvest the valuable capital that they had invested.
OTC securities trading today
Even more onerous constraints have been placed on compliance today, making it nearly impossible for investors and founders to recover their capital in OTC securities. Only Glendale, and even then, only if you have an account with $150,000 in cash or blue chips, will accept deposits of shares from investors or founders at the moment. Additional criteria include that the security must have up-to-date information on OTCMarkets.com and be DTC qualified. An opinion from a company with more than 20 lawyers will cost you, yes, $10,000 or more.
Check out this current E*Trade article on OTC securities at https://us.etrade.com/l/f/disclosure-library/otc.
How therefore should we proceed in the open markets? Here are a few of our opinions:
• Because they have built-in mechanisms for a secondary market, only employ top-tier Regulation CF and Regulation A+ platforms for investments, such as StartEngine.com or Fundable.com.
• Check that the company you invest in has up-to-date OTC Markets information and enough funds to keep reporting for at least two years, which will allow investors to properly harvest their investment.
• Verify that the company you invest in has access to the OTC Markets and has the funds to continue reporting for at least two years, which is long enough for an investor to realistically harvest their investment.
• Check out our approach on our Crowdfunding Consulting page to make sure the companies looking for finance take the route that will give them time to develop their administrative capabilities and be prepared for the public markets.
