In a recent letter to shareholders, J.P. Morgan CEO Jamie Dimon said alternative finance poses a legitimate threat to mainstream banks.
“Silicon Valley is coming,” Mr. Dimon wrote. “There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”
Much of the innovation is in lending, Mr. Dimon added, where firms can lend to people and small businesses very quickly by using big data to improve their credit underwriting ability.
“They are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs.”
“We also are completely comfortable with partnering where it makes sense.”
With each passing week that last sentence becomes more and more of a reality. Traditional financial institutions see alternative finance is not merely a passing fad and they are looking for ways to capitalize on the technological and financial advances these new players have. This only further legitimizes alternative finance.
While established financial entities are well aware of alternative finance, it is important for the alt-fi industry to remember it is just beginning to gain recognition in the larger public.
That is why conferences like FinFair 2015, taking place in New York City on July 29, so important. FinFair 2015 brings together the Wall Street establishment and the leadership driving change in the crowd-centric retail alternatives market.
R. Cromwell Coulson is a featured speaker at FinFair 2015. Mr. Coulson is the President, Chief Executive Officer and a Director of OTC Markets Group, Inc. which operates financial marketplaces for 10,000 U.S. and global securities.
Over the past 20 years, Mr. Coulson has developed a modernized, electronic and transparent marketplace to replace the previous inefficient, phone-based model. It allows companies a choice as to how much information to provide.
When a network of broker/dealers organized OTC, it benefited small companies, Mr. Coulson explained. When a company is valued below $500 million the majority of investors are individuals but once that threshold is crossed, most owners are institutional, he said.
“The order book disappears when they’re below $500 Million.”
That creates a problem because there is not enough natural standing liquidity, and the most efficient markets are the most diverse, he added.
Mr. Coulson said OTC operates three-tiered marketplaces based on the quality and quantity of information companies make available.
The OTC QX Best Marketplace (OTCM) lists established, investor-focused companies that meet high financial standards, have current disclosure and who receive third-party advisory.
Mr. Coulson said the OTCM allows investors to see prices and access market data by distributing information through such popular channels as Bloomberg, Thomson Reuters, and others. Through their Corporate Services, they allow public companies to provide additional information for investors. Investors can also trade through the broker of their choice.
The OTCQB is a venture marketplace. Listed companies must be current in their reporting to either a U.S. or foreign regulator, pass a minimum bid price test of one penny, and participate in an annual verification and management certification process where they provide additional information on their share count, advisors and company insiders. One accepted onto the OTCQB listed companies receive additional assistance with helping them build visibility and enhance transparency, including a news service allowing them to share information on the OTC website and their own site via an API link.
“The OTCQB provides greater transparency to investors while also meeting the needs of entrepreneurs,” Mr. Coulson said.
The penny minimum bid price test eliminates companies most likely to be subject to stock fraud while the real-time quotes benefit investors as they are the most current information available.
OTC Pink is their Open Marketplace, Mr. Coulson said.
“It is a broker-quoted, higher risk, transactional marketplace.”
OTC Pink offers a greater diversity of equity securities through any broker, ones that are there “by reasons of default, distress or design,” according to the OTC website. These include ADRs, penny stocks, shells, bankruptcies, and minimally engaged companies.
OTC Pink companies are assigned to one of three categories, based on how much accurate information they provide to investors. “Current Information” companies follow either International or Alternative Reporting Standards by making publicly available filings via OTC’s News Service based on OTC Pink Basic Disclosure Guidelines.
“Limited Information” companies often have financial reporting problems or are in economic distress or bankruptcy. They may not have as much information to make publicly available as other companies but are willing to publicize the information they do have.
Some Limited Information companies may be financially sound but unwilling to provide a sufficient level of disclosure to meet OTC Pink Basic Disclosure Guidelines.
“No Information” companies provide no disclosure. OTC advises diligent research when considering such companies.
Twenty years in and OTC Markets generate $238 billion in volume and two-thirds of the companies are American depositary receipts from large international companies, Mr. Coulson said.
OTC is also by far the leader in creating graduates to exchanges, Mr. Coulson said. In 2014 83 OTC companies made the leap, compared to 22 for the TSX and five for the AIM. More than 400 OTC companies have graduated in the past five years.
Given that the majority of investors in OTC companies are individuals, the exchanges were designed with their needs in mind, Mr. Coulson explained. There is a high priority on transactional efficiency so broker/dealers can easily connect with buyers and sellers.
“Investors need high-quality information so they can place the appropriate value on a company,” Mr. Coulson explained. “Investors don’t also necessarily want companies to waste all their time on compliance.”
Mr. Coulson added this allows younger and smaller companies the flexibility to mature while providing investors with a sufficient amount of information in order to make informed investing decisions. He compared it to eBay or Etsy where some sellers are more transparent than others, and a buyer’s selections depend on their risk appetite.
Mr. Coulson is excited about the JOBS Act, saying it fundamentally changed the idea of how capital can be raised.
“The basic idea of the JOBS Act is there are multiple paths by which a company can raise capital,” he said.
The existing system was designed in a much different time, Mr. Coulson explained. The confidentiality requirements no longer make sense in the internet age where information is much more freely available.
“Investors don’t want a salesman,” Mr. Coulson explained. “They can find the information themselves.”
If you let shares be freely tradeable, they become more valuable the more you remove restrictions on selling them, Mr. Coulson said.
“The most sustainable companies are public companies.”