The Key to Solving Micro Cap Liquidity is Better Business Models & Better Management

Of course there are many factors that contribute to a micro cap companies liquidity, whether private or public, but for the purposes of this article we are speaking about companies trading over the counter generally on OTCMarkets Inc.

Penny Stocks often go public with the perception that stock buyers are more available on public markets.  The management is generally sold on the idea that selling their stock will be easier with a “stock symbol”.  And it can be.

However, as of the writing of this article the industry is still saturated with “Story Stocks” or companies that simply have a business plan and no actual operating business.  They file an S1 form, appropriate documents with the Over The Counter Marketplace and begin to promote their stock.  If the funds allow they hire an investor relations firm and heavily push the marketing of their securities to broker dealers, the internet and just about anybody that will hear them.  Some penny stocks become what a fellow industry veteran has termed “press release factories”; sending press release after press release through newswires hoping to peak interest enough for someone to purchase the stock.

And if done properly, press release factories work, for a while.

Since there is no actual business generating money the only option the company (management) has to continue operations are the hopes of their business plan (1) raising more capital or (2) a buyout?  Many of these companies barely had enough capital to go public, never-mind stay public.  After all, they are “going public” to raise money, right?

Here is the problem;

Under option (1) the management of the penny stock company goes to investors and presents a plan, but that’s all it is a plan!  These investors either laugh at the plan or offer terms that only a CEO that plans on being there for the next few weeks would accept.  But what about the millions and millions of retail investors?  They don’t exist.  Generally for such speculative investments as penny stocks (most relying on exemptions from Securities Laws) the S.E.C. mandates that the investor be an “accredited investor” thus taking out that large number of investors management generally thought they were capturing by going public.  And most broker dealers like your ScottTrade or AmeriTrade or Morgan Stanley won’t let the retail investor buy a few hundred shares on the open market on a Tuesday afternoon.  Many times OTC penny stocks don’t meet the criteria of these dealers.

Under option (2) the management of the penny stock or micro cap company look for a merger or buy-out.  The craziness behind a business with no revenues or little-to-no revenues getting purchased from another company is crazy.  But it does happen.  And when it does, it is rarely sustainable with the purchasing company quickly either dissolving the purchased company or them market cap of the companies after merger becoming extremely volatile until it settles at a price somewhere at or below the original market cap; thus creating no real value.

So how do we increase the liquidity of a penny stock or micro cap company?

We believe the answer to be better management and better business models.  Better management allows for investors to be more prone and confident in purchasing company stock.  A better business model will make management more confident in selling the company stock; since they truly believe it will go somewhere.  Unlike the swag that most micro cap consultants pitch, the raising of funds does not happen automatically when you file an S1 form with the SEC or take a company public over the counter.  And even if a clever and engaging investor relations agent manages to raise a million dollars for a penny stock, keep the stock price up is a product of solid managers and a solid business model.

Better yet, managers will know where to put their investor money to make more money rather than continue to try and raise money OTC and use the proceeds to simply stay public.

Agree or disagree, your company should be looking to form the most vetted, willing and able management on earth to execute a sustainable business model.  If this is done, regardless of how many rounds of financing you are looking for, not only will the money come easier, but it will be needed less and less as the business grows.

If you would like our to retain the Cervitude Investor Relations team to help your micro cap company or penny stock succeed in the hectic OTC environment, email us at today.

The Cervitude Team

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