How European firms can efficiently access US investors

Britvic, a mid-cap soft drinks maker based in the UK, has been working with OTC Markets since 2010 following its IPO on the London Stock Exchange in 2005.

For Britvic’s director of IR Stephen Nightingale, working with an over-the-counter trading provider was about extending the reach of the firm’s ADR program and cementing its messaging in the US. Britvic worked with its ADR sponsoring bank and OTC Markets to broaden the range of targets it could approach. ‘We had a broad market-engagement program that was multi-market, part of which was driven by the fact that many people were aware of us as a Pepsi bottler,’ Nightingale says. ‘We hoped to attract the attention of investors on a more global basis.’

He adds that it’s crucial to ‘think about the US more broadly’ and recognize that a lot of money moves outside of Tier 1 money centers such as New York or Boston. Working alongside OTC Markets and Britvic’s ADR sponsor meant the firm could access money away from these traditional investment centers.

The result was access to ‘big pots of money’ that Britvic may never have encountered otherwise due to its market cap, says Nightingale. He has also observed an indirect benefit: Britvic’s investment story is distributed more widely as a result of it being traded on OTCQX, and he has seen a corresponding increase in interest in the company’s stock. ‘We have a top 10 shareholder that became aware of us through the ADR program, and ultimately took a position through ordinary shares,’ Nightingale reveals. He adds that patience when building Britvic’s position in the US was crucial. ‘Investors are familiar with some of our brands, but explaining the concept of some of our more specialized goods – such as fruit squash – to foreign holders can be challenging,’ he says. ‘If you don’t have a global name, you need patience when building awareness of your firm and products.’

His advice for firms considering a similar move is to keep this patient approach in mind. ‘Work with a supportive sponsor and Market,’ Nightingale recommends. ‘It’s about going beyond what you’d do traditionally – whether that’s virtual conferences to reach more distant holders, or something else – to make your life easier. If you’re more accessible, there’s more opportunity for your stock to be traded.’



Orexo - The main reason to upgrade and trade on OTCQX was to improve our US investor baseNuovo paragrafo

Orexo is a mid-cap pharmaceuticals company based in Uppsala, Sweden that specializes in treatments and digital therapies, especially in the growing addiction space

Lena Wange, investor relations and communications manager at Orexo, says the drugmaker’s journey to cross-border trading started as part of a broader build-up of the firm’s US commercial operations, when Danish investor Novo Holdings was brought in as its largest individual shareholder. A switch of strategy and a renewed focus on products in the US meant that, by 2013, making Orexo’s stock available to American investors was of paramount importance.

‘The main reason to upgrade and trade on OTCQX was to improve our US investor base,’ confirms Wange. ‘It also related to a policy-stamp for our company: you have to go through a narrow regulatory process to trade cross-border. Having evidence of doing that, that we had that quality as a company, helped us a lot in our efforts to reach out to US investors.’

Today, with the company’s renewed focus on digital therapies for alcohol and opioid abuse, Wange says being traded on the OTCQX will be more important than ever as she relays Orexo’s story to the market. ‘I think that will attract more US investors to Orexo,’ she explains. ‘We see that there is a mix of potential shareholders and interest from investors in the US.’

Wange’s future focus is on getting two members of Orexo’s management team – who currently live in the US – in front of investors: ‘We will start working with our partners to map out where these investors are located and do what we can to actively reach out to them.’

As the firm is already being traded on OTCQX, Wange says the path to picking up this US activity once more has been simplified. In addition to that ‘quality stamp’ that investors see, the ease of access is particularly important, she explains.

‘I think we are in a very good situation at Orexo now to accelerate our outreach to US investors,’ Wange concludes. ‘We have some exciting products in the pipeline and, company-wise, we are in very good shape.’

BASF - The cost blow of overseas trading has been dampened by our inclusion on OTCQXNuovo paragrafo

Being available to US investors was always a priority at BASF, says Dr Alex Sokolowski, North American institutional investor lead at BASF. ‘Having a diversified shareholder base, and having access to the world’s largest equity market, is important and attractive to us,’ he explains. ‘We have about 20,000 employees in the US, too. Providing a means for investors to acquire our shares and receive dividends in US-denominated currency was critical.’

The German chemicals producer was listed on the NYSE until its listing requirements became prohibitively expensive, says Sokolowski, and some larger institutions had created F-shares to enable trading of BASF’s stock. But the desire ‘to have some insight and control’ of that trading led BASF to opt for a sponsored ADR program backed up by trading on OTCQX. The latter, Sokolowski says, is a ‘little seal of approval’ for US investors that shows regulatory requirements have been met and marks BASF as a high-value stock.

The mission to get the firm’s equity story in front of investors has been made easier by aid from OTC Markets and BASF’s depositary bank, Sokolowski says. ‘OTC Markets is great at making videos on YouTube where I explain our equity story, or bringing me in to speak to journalists, or just having a presence in the elements of the whole process,’ he explains. Another part has been getting BASF in front of retail investors, whether through specialized events and roadshows or trips to see smaller retail markets – particularly in the ‘three Ms’, says Sokolowski: Minneapolis, Madison and Milwaukee.

He adds that the main misconceptions he had about the market were quickly disproved. ‘For the company, the cost blow of overseas trading has been dampened by our inclusion on OTCQX,’ he explains. Regulation, too, was a concern but working alongside BASF’s sponsoring bank and OTC Markets has meant much of the regulatory burden was taken off the issuer’s shoulders.

‘OTC Markets handles whatever it needs to, so we get less of that burden put on us as a firm, beyond what we already do in Europe’ says Sokolowski. ‘It’s one reason we’re not on the NYSE anymore.’

The investor perspective: How it works

MCAP Markets is a financial technology developer and electronic market-maker that deals largely in ADRs, foreign ordinary shares and fixed-income assets for customers in the US, Asia and Europe. Managing director Stefan Spath has had stints as an investment analyst and as a currency trader, but just prior to his work at MCAP he was managing director of the corporate advisory division at INTL FCStone Securities.

Spath describes the advent of more sophisticated OTC Markets as arriving in the wake of a sweep of corporate regulatory reforms – more familiarly known as the Sarbanes-Oxley (Sox) Act – put in place by the SEC in 2002. Born out of the regulatory environment that resulted from a few large-scale corporate scandals, such as those surrounding Tyco and Enron, Sox required far more of companies and their boards with regards to financial reporting.

‘The SEC decided it was time to knuckle down and create more stringent rules related to governance and reporting requirements,’ explains Spath. ‘The unintended consequence was that perfectly good companies – global, blue-chip firms – were really required to duplicate their efforts in the US market if they wanted to retain a US listing. Many thought it would not bring them enough value to justify the duplicated work, so they delisted from the NYSE and Nasdaq.’

If Sox’s stringent measures could not be met, trading of these equities was restricted to ‘over-the-counter’ markets. At the time, these markets were largely composed of thousands of small or micro-cap firms, some of which were going through reorganization or bankruptcy. It meant that, suddenly, securities in multibillion-dollar European corporates might be trading side by side with, say, a bankrupt junior Canadian mining firm.

Some of those companies include household European names, like insurer AXA or food products manufacturer Danone, which delisted from the NYSE in 2010 and 2007, respectively, citing low trading volumes and the fact that US regulators did not recognize their European accounting practices in favor of the Gaap system.

In light of this, OTC Markets Group realized there was still a large investor appetite for firms that could distinguish themselves as assets worth having. The OTCQX Market emerged in the following years, with an application process whereby firms that wished to be traded would have to meet additional financial requirements and ongoing obligations. For OTCQX, each equity also requires a third-party broker-dealer or US securities attorney to attest that the company in question qualifies to be traded. AXA and Danone, which began trading on OTCQX in March 2010 and May 2011, respectively, immediately saw the benefits.

Investment conduit 

Firms like MCAP make markets in several thousand different securities – most of which are non-US based – for their clients. Spath describes his firm’s role as ‘a conduit between US investors and non-US securities that are traded in non-US markets’ and says the role of markets like OTCQX has ‘hugely simplified’ the post-2002 trading environment. He illustrates the point with an example of a Danish technology company that wishes to access a pool of US investors, but cannot contend with the large regulatory burden of listing on the NYSE.

‘Let’s say the firm has appointed a sponsor – a US broker-dealer or attorney,’ Spath explains. ‘Once we get a few regulatory steps out of the way, the market-maker will publish a quotation with the security, typically based on where the security is quoted in its home market. This includes information like the security’s individual volatility, or any fluctuations between the US dollar and the security’s local currency, for example. Then it is quoted with a bid and an offer price so brokers can get in touch to buy it.’

Orders are constantly coming in from investors throughout the day, before stockbrokers aggregate them and route the buy or sell commands through to market-makers quoting the securities – all during US Market hours and in US-dollar amounts. These brokers facilitate a flow of deals from the largest institutional investors through to everyday retail buyers, who make up a significant proportion of US capital pools.

‘If the order came through to MCAP, we would fulfil it by selling the securities to the end-investor,’ Spath says. ‘If we don’t have inventory of that stock, we have created a short position on our book. Then the following morning, the trader responsible for that name will go to Copenhagen and buy those shares from the local exchange.’

Indeed, the stock symbol visible on markets like OTCQX would indicate that while – in this example – there is a Danish company’s stock traded on the market, the instrument in question is a synthetic symbol that represents actual ownership of that actual share that is traded locally.

Legal constraints 

There are also the Blue Sky Laws to contend with, which, among other things, require share issuers to register and provide detailed financial information on any offerings they make. Spath says the regime can be ‘inefficient’, as it requires a board of state-appointed regulators to pass any share issue, and their decision is often based on factors like a firm’s business plan, which can be misleading.

OTCQX has brought compliance for Blue Sky regulations in-house for a number of states, so companies can have their securities traded and even recommended by brokers where applicable. It means trading can be a ‘two-way street,’ says Spath, so brokers can recommend to their clients what they perceive to be a must-buy security.

‘OTC Markets Group is trying to centralize, organize and evolve the over-the-counter space,’ he continues. ‘It wants to foster more activity and raise the profile of the market, to make it equivalent to a national stock exchange. It’s a sign of modernity: we don’t need to have a physical exchange anymore.’

This means the market-maker is ‘simply a conduit that allows a US investor to buy that foreign share seamlessly,’ adds Spath, thanks to ‘all the hurdles being removed.’ The exchange serves as a ‘three-way’ process, he explains: the company itself gets more visibility with investors; investors can get further information about an overseas stock to make a better-informed decision about what to buy; and market participants can freely enable this trading activity.

And, at times like this, when the capital markets have come to be defined by a period of unprecedented uncertainty, being prepared for easy trading could make all the difference, adds Spath: ‘As things revert to a mean, we will see a rebound in the market. When it comes to international securities traded over the counter that would like to be on OTCQX, if they are waiting for the rebound to occur, there’s going to be a tremendous bottleneck to the regulatory hurdles to get on the market.

‘I’ve been telling companies that in order to get through them, it makes sense to start now, so they’re ready and visible when the rebound inevitably occurs.’

by Alessio De Filippis, Founder and Cheif Executive Officer @ Libentium.

Founder and Partner of Libentium, developing projects mainly focused on Marketing and Sales innovations for different type of organizations (Multinationals, SMEs, - Start-ups).

Cross-industry experience: Media, TLC, Oil & Gas, Leisure & Travel, Biotech, ICT.