SOURCE: Small Equity Initiative

Small Equity Initiative

May 05, 2010 09:08 ET

The Small Equity Initiative to Present Business Case for Over-the-Counter Co-Op

DALLAS, TX--(Marketwire - May 5, 2010) -  The Small Equity Initiative (SEI) today announced a Webcast scheduled for Monday, May 10th to present a business case for over-the-counter (OTC) listed companies to join together in a co-operative for the purpose of containing costs associated with regulatory compliance, improving access to conventional and investment financial services and working together to improve the overall OTC market environment for shareholders. A link to the Monday Webcast will be published upon release at www.smallequity.com and emailed to the SEI email database. The Monday Webcast announcement follows a letter released by the Small Equity Initiative yesterday titled "Too Small to Fail." The letter has been re-released in its entirety within this press release below and is also available at www.smallequity.com

The Small Equity Initiative is a not-for-profit organization established by the founders of NewMarket Technology, Inc. (PINKSHEETS: NWMT) (OTCQB: NWMT) and China Crescent Enterprises, Inc. (OTCBB: CCTR) to coordinate education, advocacy and activism to improve the capital markets for both small business entrepreneurs and investors. The Small Equity Initiative itself is a small operation today with big objectives intended to improve access to capital for small, start-up and early stage businesses and improve the return on investment potential for the individuals and institutions that invest in the small business sector. 

"Dear Entrepreneurs and Over-The-Counter Investors:

"This letter is a call to action. The world's political leaders are ignoring the largest contributor to the global gross domestic product and small business entrepreneurs and investors have nowhere to turn but to each other.

"Small businesses account for over 90% of all registered enterprises around the world and approximately 70% of all employment. Even in the United States, the leading economy in the world, 50% of all jobs come from companies with less than 500 employees and that doesn't take in account approximately 20 million people reporting as self-employed. While the world's political leaders direct billions, if not trillions, of taxpayer dollars to bail out companies "too large to fail," the small business landscape is getting even more difficult.

"The U.S. Government has engaged in a very public battle to ostensibly reform Wall Street through lawsuits and rhetoric. At the same time, actual regulatory changes are quietly underway that continue to erode the small business investment market to the detriment of entrepreneurs and over-the-counter (OTC) investors.

"No economist would argue that economic recovery has historically been led by the small business sector and no economist can argue that the small business sector, at this time, is not getting the attention needed to fuel a real economic recovery. Reported unemployment in the United States remains at nearly 10% and actual unemployment is arguably higher, yet world political leaders are somehow declaring economic recovery victory. Until the small business sector can post meaningful enterprise start-ups that substantially exceed business failures, real economic recovery traction cannot be truly established.

"Based on the apparent disregard for small business stimulus, at this time, the small business sector cannot rely on any government to fuel small business growth. The small business sector has to rally its own resources for its own good and the good of the global economy.

Over-The-Counter Markets and The Small Business Economy

"Why do I bring up the OTC markets in my call to action when only about 10,000 companies are listed on the U.S. OTC markets out of millions of registered small businesses? Because I contend that the U.S. OTC markets currently provide the best source of standardized and consistent investment for small, early stage or start-up businesses. Also, because I believe the U.S. OTC markets provide the best opportunity for investors to benefit from the return on investment potential of the world's largest economic sector. Yes, I think the U.S. OTC markets have plenty of room for improvement -- and that's an understatement. Nevertheless, retail investors purchasing stock in OTC listed companies can realize substantial returns if they realize that the strategic approach to achieving potential returns is significantly different than achieving a return on an investment in a company listed on a national exchange such as the NYSE Euronext.

Over-The-Counter Investing

"If you found this letter's headline of enough interest to make time to read this letter, you are probably already aware of the facts regarding the life expectancy of small businesses. Most small businesses do not sustain operations beyond three years. Keep in mind however that the small business sector accounts for the majority of global employment and the majority of the global gross domestic product. What does that tell you? It tells you that entrepreneurs don't just start one business in their lifetime, but multiple businesses. As one small business reaches the end of its lifecycle, the founding entrepreneur starts a new business and probably hires many of the same employees working at his last business. If you want to realize a return on a small business investment, your investment horizon should likely be less than the three year statistical life expectancy of most small businesses. While most small businesses will not sustain beyond three years, many will at least realize some profitable milestones achievements within their three-year lifecycle that have the potential to deliver a return to the investors that funded the start-up or one of the initiatives that led to a milestone achievement following the start-up.

"Small business investing is significantly different than big business investing, but the industry experts, analysts, investment and commercial bankers put a big business assessment template on the small business sector. That big business template distorts the fact that the small business sector is the biggest contributor to employment and gross domestic product and that somewhere within that employment and gross domestic product contribution is probably a good, if not great, return on investment opportunity.

The Milestone Investment Strategy

"A small business that is publicly listed expands and improves the opportunity to realize the return on investment potential from a small business. Those milestone achievements that most small businesses will realize within what might only be a three-year lifecycle can create an increase in share price and trading volume that in turn can provide a return on investment opportunity to those retail investors that accumulated a small position in anticipation of a milestone event. Instead of buying and holding a long-term position as one might with a big company listed on a national exchange, investments in smaller companies listed within the OTC markets must be much more actively managed.

"The top 100 most actively traded stocks on the Over-The-Counter Bulletin Board (OTCBB) currently trade at an approximate average share price of $0.02. The total average daily trading volume of the top 100 most actively traded OTCBB stocks is approximately $30 million a day. The top 100 most actively traded stocks on the Pink OTC Markets trade approximately $50 million a day in total volume at an average share price of $0.006. If a milestone event results in a $0.01 price increase or even half that amount, a retail investor that accumulated stock leading up to the milestone stands to potentially realize a very good return on investment. The average total annual trading volume for the approximately 10,000 U.S. OTC listed securities is over $100 billion. The U.S. OTC market can be a dependable platform for small businesses to form capital as well as reliable venue for retail investors to realize sound returns from investments in small businesses.

Capital Formation For the OTC Listed Small, Startup or Early Stage Business

"Writing a $100,000 to $1,000,000 check to a small business to fund start-up or milestone expenses can often be more of a gamble than the typical institutional investor is willing to make. Few institutional investors are willing to take such a gamble on a direct investment into a small business with a statistical life expectancy of only three years. However, when that small business is publicly-listed and the $100,000 to $1,000,000 investment return can be monetized with publicly-traded stock, entrepreneurs can find many institutional investors now willing to make such an investment.

"On average, U.S. OTC listed companies that publicly reported financial results had approximately $17 million in annual trading volume in 2009. About 5,000 of the approximate 10,000 OTC listed companies publically reported financial results. Companies that did not publically report financial results had approximately $2 million in annual trading volume. If an institutional investor would conservatively be willing to invest an amount equal to approximately 10% of a company's annual trading volume, then a non-reporting OTC listed company could reasonably raise $200,000 a year to fund their business plan and a reporting company could reasonably raise $1.7 million a year to fund their business plan. The $200,000 to $1.7 million range is a conservative estimate and based only on average OTC performance. Some OTC companies trade substantially higher volumes and could potentially garner a higher investment level from an investment structure that monetizes the return to the institutional investor through the issue of stock.

OTC Education to Improve Small Business Capital Formation and Returns

"The OTC markets currently provide a good source of mutually beneficial opportunity for entrepreneurs to raise early stage capital and for investors to realize reasonably risk mitigated yet attractive returns -- But, the OTC market opportunity could still be better.

"Regulators and institutional investors approach the OTC markets with the same tool box used for national exchanges. The situation amounts to a 'square peg in a round hole' issue. Nevertheless, I maintain that even before any improvements are made, the U.S. OTC markets are currently the best source of standardized and consistent early stage capital for small, start-up and early stage enterprises available anywhere in the world today. I believe a little education on the OTC markets could go a very, very long way in making up for a variety of 'square peg in round hole' related issues. Few entrepreneurs understand the dynamics of raising capital on the OTC markets. Likewise, many retail investors approach the OTC markets with a Warren Buffet, national exchange-oriented return on investment expectation. Well, Warren Buffet does not invest in the OTC markets and his investment advice does not apply here. Yes, we need to advocate for small business regulatory and investment banking reform, but I believe the biggest and fastest small business capital market improvements can be realized from an investment of time and talent in OTC market education.

"My family launched a technology company in 1997. In 2002, in an effort to overcome the fallout of the dot-com market collapse, we listed on the OTCBB in order to get access to the U.S. OTC capital market. Over the last eight years we have been to the MBA School of Hard Knocks. Even with all the lumps we have taken in the OTC market, we still have come to believe in the promise of the OTC market to grow into a more widely recognized, respected and accepted small business capital market.

Call to Action

"Toward that end, we formed the Small Equity Initiative (SEI) as a not-for-profit organization founded on our own OTC market experience with a mission of providing education, advocacy and activism. We will lead with education by sharing our own entrepreneurial fundraising experiences in letters like this one, blogs, Webcasts and e-mails. In short, we're going first. We will show ours, and now we want you to show yours.

  • Share your experiences with us at info@smallequity.com so they can be broadcast from the SEI website
  • Forward this letter or a link on to another entrepreneur or small business investor 
  • Sign up to receive updates at www.smallequity.com so we can make sure you receive the next round of lessons learned from other small business entrepreneurs and investors. 

"When we are ready to advocate for reform, with your e-mail address in the SEI database we can coordinate e-mail campaigns to regulators, lawmakers and investment bankers. We don't have to wait for the next election to put the democratic process to work. We can vote our conscience in regard to small business economic reform today and every day, with communications to a regulator, lawmaker or investment banker expressing our position or better yet, with a small business investment demonstrating our position.

"Within the United States, approximately 50 million jobs come from organizations with less than 500 employees and another 20 million people report as self-employed. Full employment in the United States is approximately 120 million. Statistically, most of us reading this letter are likely receiving a paycheck from a small business. We have the clout to empower an improved small business economy. Recognizing that the small business sector accounts for the majority of the world economy, one might even suggest we have the responsibility to empower and improve the global small business economy. The world's political leaders have so far largely ignored the small business sector since the 2008 global financial crisis. We have nowhere to turn but to each other as small business entrepreneurs and investors. 

"Stay tuned for upcoming communications from SEI on:

  • OTC Regulatory Hurdles to Small Business Finance and Performance
  • It's Not a Recession, It's an Economic Revolution
  • Entrepreneurial Finance on the OTC
  • Entrepreneur Co-Ops and Credit Unions
  • Small Business Public Markets Around The World

"Take action today. Forward this letter and respond to this letter to info@smallequity.com with your own experiences."

Best Regards,

Philip Verges
Founder 
Small Equity Initiative

About The Small Equity Initiative www.smallequity.com
Small Equity Initiative is a not-for-profit organization dedicated to improving the opportunity for self-directed retail investors to profit from over-the-counter investments and for entrepreneurs to gain better access to capital for their business plans. The Small Equity Initiative (SEI) plans to build a community for small business investors and entrepreneurs aimed at improving the collective understanding of how the over-the-counter market really works today and how it can be improved in the future. SEI is based in the U.S. but serves the global small business community.

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