Trading places: the level your stock trades on could mean the difference between obscurity and prosperity - over-the-counter stock market

Entrepreneur, June, 1996 by David R. Evanson

The level your stock trades on could mean the difference between obscurity and prosperity.

Jerry Swon and Bruce Deichl have the oil and gas industry by the tail. But before the common stock of Concord Energy Inc. in Bernardsville, New Jersey, began trading on the right part of the over-the-counter (OTC) stock market, nobody knew it.

Though Concord produces oil and gas, its emphasis at the moment is on two red-hot subsidiaries that fit hand in glove with many of the larger trends shaping the domestic ail and gas industry. Concord's KEMCO unit, for instance, refurbishes and resells gas-processing equipment. According to Deichl, many major oil companies are going overseas and leaving behind domestic properties with massive but unused processing potential. With the energy sector starting to percolate, business is robust.

While this business is stable and growing, Concord's Integrated Petroleum Systems subsidiary is daring and explosive. It's based on the idea that rather than using pencil and paper to monitor wells, why not provide field workers with handheld computers instead? A daily data download would provide near real-time management reports--a huge improvement over the two to three months or more it otherwise takes to get a good field data report.

"Conservatively," says Deichl, "this is an emerging $600 million industry, and we're on the leading edge of it."

* THE FOUR MUSKETEERS

While Concord is exactly the kind of innovative company the OTC market is supposed to nurture, in the case of Deichl and Swon--and thousands of entrepreneurs like them--the market was providing more obstacles than opportunities.

In truth, the OTC market is not one stock market but four. The top tiers-the NASDAQ SmallCap Market and the NASDAQ National Market, where the Intels and Microsofts of the world trade, are well-known, thanks in part to a snazzy ad campaign run by the National Assaciation of Securities Dealers (NASD), which owns and operates the NASDAQ stock market. But the bottom two tiers--the OTC Bulletin Board and the Pink Sheet Market--represent the Siberia of the capital markets.

Generally speaking, the differences between these marketplaces can be expressed in terms of visibility and liquidity. Companies that trade on the National Market system or the SmallCap Market have their stock prices widely distribution Investors can get news fast, see what's going on and, in most cases, easily buy and sell shares. Companies that trade Pink Sheets--so characterized for the color of the one publication that tracks their stock prices--are more shadowy. Sometimes stock prices are not even published, just the names and numbers of the brokers who sell them. Without any centralized electronic monitoring of the prices at which shares change hands, Pink Sheet stocks can be a real crap shoot. And while Bulletin Board stock prices are available on NASDAQ terminals as well as in the Pink Sheets, these stocks, like their lower-rung siblings, are far less liquid than the stocks on the upper two tiers.

* PARDON OUR APPEARANCE

In the world of finance, obscurity can sometimes be an asset. But according to Bob Rader, a principal with Oklahoma City investment banking firm Capital West Securities Inc. who is also an advisor to Concord, companies shooting for the stars don't want their stock languishing on the Bulletin Board or the Pink Sheets.

"The problem," says Rader, "is that it's hard to work with stocks [traded on these market tiers] because so few people can buy them." For instance, he notes that National Market system companies get "Blue Sky" exemptions in every state--meaning they get approval from state securities commissions to sell their stock to the state's residents. By contrast, Bulletin Board companies must manually file for approval in each state where they anticipate there might be investors who want to buy. "Unless a company is willing to do an awful lot of legal work, it can forget about distributing stock on a national basis," says Rader.

Far more damaging than Blue Sky restrictions, however, are NASD rules preventing brokers from soliciting new customers for Bulletin Board or Pink Sheet stocks, says Rader. And when a buy order comes in, it must be accompanied by what amounts to a permission slip from the customer. "With 30,000 stocks out there," says Rader, "brokers simply won't go through what's required to trade in these stocks."

Along with these regulatory hurdles come others. For instance, most major brokerage firms will not let their brokers traffic in Bulletin Board or Pink Sheet stocks--end of story. And with that goes almost any chance of getting analyst coverage.

* WHO CARES?

Some companies don't mind the isolation. Some, it seems, would rather not be public to begin with. But for many others, the reason to go public is to attract and reward good employees, elevate the company's visibility and prestige, and, finally, to use their stock as a currency for acquisitions. Unfortunately, when a stock languishes on the Pink Sheets or the Bulletin Board, none of these objectives can be realized very easily. In fact, on these points a company may even find itself going backward.