DirectMarkets – Second Look

Dennis McCarthy – (213) 222-8260 – dennismccarthy@ariesmgmt.com

My post announcing the planned launch of DirectMarkets, Rodman & Renshaw’s new automated system which permits companies to sell their stock directly to investors, prompted lots of questions.

At the moment, the best I can do is to give you the press release (copied below) on DirectMarkets’ website (www.directmkts.com).

My reaction upon reading the planned scope of activities is that DirectMarkets is clearly ambitious and, if successful, would transform Wall Street.  In fact, its’ aim seems to be to dis-intermediate Wall Street.

For example, DirectMarkets would offer investors access to company information, both standard stuff like SEC filings and company presentations as well as “interactive” access to company executives. Will DirectMarkets obsolete roadshows and conferences?

DirectMarkets’ key function, however, enables investors to offer to buy primary shares directly from a company.  Also, it appears that investors can buy shares from company executives and other shareholders who sign up to DirectMarkets.  Share sales would be completed through the site using standardized documentation.

As I read the press release, two words came to mind, “transparency” and “orphans”.

It appears that DirectMarkets offers  greater “transparency”.  Is that good?

Today, investors and companies go to great lengths to avoid transparency.  Just who’s a buyer or who’s a seller and at what price and how much do they have to sell or want to buy.  These are closely guarded secrets.

Investors’ desire for secrecy seems to apply whether the underlying company is large or small.  For smaller, less liquid companies, greater transparency may result in greater volatility.  Is that good?

Second, if DirectMarkets is successful, the dis-intermediation of Wall Street may further orphan small and microcap companies.

Already, several developments have reduced Wall Street’s profit from small and microcap stocks.  There’s simply not enough revenue potential to justify Wall Street’s cost to research and trade in many small or microcap stocks.

DirectMarkets may save companies some money in their new stock sales but may further “orphan” those same companies.  Is that a good tradeoff?

Do small and microcap companies need Wall Street support to get attention from among the thousands of companies vying for investor attention.

Do small and microcap companies benefit from Wall Street’s research with its independent projections and from Wall Street’s salesmens’ constant reminders.

The answer to these questions may determine the adoption rate of DirectMarkets.  I know we’ll all be watching to see how this plays out.

Press Release:       Rodman & Renshaw Launches DirectMarkets:

First-Ever 24/7 Automated Electronic Transaction Platform to Link Issuers with Investors for Primary Offerings of Securities by Existing Publicly-Traded Companies

— Kevin Lupowitz Recruited as CEO of DirectMarkets —

NEW YORK–(BUSINESS WIRE)– Rodman & Renshaw Capital Group, Inc. (Nasdaq: RODM), via a new subsidiary, DirectMarkets, will unveil an automated state-of-the-art electronic transaction platform to directly link existing public company issuers and investors seeking to transact primary offerings of securities. DirectMarkets will bring unprecedented, cost-efficient access to the capital markets into the C-Suite of public companies and bypass certain traditional roles typically held by investment banks that presently control the transactional process. Both investors and issuers will benefit from 24/7 seamless access to DirectMarkets’ platform through a graphical user interface (GUI) accessible via a desktop or laptop computer, as well as any mobile smart devices such as tablets or smartphones. The official launch will take place at the TradeTech 2012 Conference in New York City that begins on March 6, 2012.

With its many features, the DirectMarkets platform will empower issuers to sell shares (covered by a shelf registration) directly into the secondary market and to complete funding transactions at a fraction of the current cost. Using the same platform, investors will be able to directly contact issuers, with effective shelf registrations in place, to indicate their interest in buying that issuer’s stock, effectively gaining the ability to accumulate stock positions in a more cost-effective manner than through on-going open market purchases.

Suitable for companies listed on NYSE, NYSE Amex and NASDAQ, as well as unlisted OTCBB companies, the DirectMarkets platform is designed to bring greater efficiency and cost savings to current methods that public companies use to effect financings, including follow-on offerings, Registered Directs (RDs,) At-the-Markets (ATMs), Confidentially Marketed Public Offerings (CMPOs) and Private Investments in Public Equities (PIPEs). Adaptation of the platform across international markets will also be pursued by DirectMarkets.

To lead DirectMarkets, Rodman has recruited Kevin Lupowitz as Chief Executive Officer of the DirectMarkets operating entity. Before joining DirectMarkets, Mr. Lupowitz, age 42, was the Chief Information Officer at FXall, a leading electronic foreign exchange platform. Previously, he was a founding employee of Liquidnet, the global institutional trading network, where he was also Chief Information Officer.

By providing added efficiencies that link issuers with purchasers of securities, while substantially reducing related fees and expenses because of the limited role of intermediaries, the DirectMarkets platform is positioned to be the catalyst for a major paradigm shift in the securities industry. As Edward Rubin, Chief Executive Officer of Rodman & Renshaw, explained: “DirectMarkets is an outgrowth of Rodman’s continual evolution and desire to lead, innovate and service the capital needs of both issuers and investors. We have always recognized the need to be swift in adapting to changes in financing approaches and marketplace requirements. DirectMarkets will be a game-changer and with Kevin Lupowitz’s talent and experience at the helm, this new electronic transaction platform is the catalyst that will redefine Rodman as an innovative technology company focusing on the financial services industry, while strengthening our legacy business.”

The DirectMarkets platform will complement Rodman’s various other business activities, including its market making, sales & trading, research, investment banking, and conferences. In assessing the multiple advantages, Mr. Lupowitz added, “I look forward to heading DirectMarkets. Rodman already has a solid foundation of thousands of potential issuers and investors. DirectMarkets will capitalize on those existing relationships to provide issuers with efficient access to market demands. We will have a unique competitive advantage as the platform gains traction and we begin the process of easing issuers and investors through the transition from manual transactions to our new automated platform.”

In conjunction with the launch of DirectMarkets, Rodman & Renshaw Capital Group, Inc. intends to change its name to Direct Markets Holdings Corp., subject to stockholder approval at its 2012 Annual Meeting of Stockholders scheduled to be held on May 4, 2012. Rodman’s sales & trading and investment banking operations will continue to be conducted by Rodman & Renshaw, LLC.

DirectMarkets Key Features

The DirectMarkets platform’s functionality will include:

  • 24/7 seamless access to the DirectMarkets portal through a graphical user interface (GUI) utilizing a desktop or laptop computer, or any mobile smart device such as a tablet or smartphone.   Providing Execution Management System (EMS) and Order Management System (OMS) integration for primary offering transactions.
  • Connectivity among public companies, institutional investors and sell-side firms to facilitate the purchase and sale of securities, typically off an issuer’s existing shelf registration.  Matching secondary market demand (i.e., investor demand typically fulfilled through transactions effected on exchanges or alternative trading systems) with a new source of supply: primary offerings of securities by existing     publicly traded companies (i.e., direct purchases from issuers) utilizing reverse inquiry processes. Enabling investors to express interest directly to an issuer in its securities, becoming a catalyst for a potential transaction.
  • Workflow management tools for complex financing transactions beyond the standardized offerings of common stock at an agreed-upon price. Automating and standardizing the closing process for capital markets transactions from engagement letter through document negotiation, allocation and settlement resulting in significantly reduced costs and transaction expenses for the issuer.
  • Seamless management of ATMs by issuers through the DirectMarkets portal, efficiently selling securities directly into trading markets, reducing costs and taking advantage of market trends and opportunities.
  • Ability for issuers to seamlessly manage and monitor open-market buy-back programs through the DirectMarkets portal.
  • Connectivity among holders of large blocks of an issuer’s securities and interested purchasers, enabling such purchasers to identify and contact such holders directly, and providing venture capital firms, private equity firms, chief executive officers and other senior executives with additional opportunities to monetize their holdings.  Enabling executives to sell 144 restricted and control securities into a     trading market in compliance with holding period, volume restriction and manner of sale regulations.
  • Providing an issuer-managed social networking platform where issuers can communicate directly with investors on a targeted or non-discretionary basis through interactive (e.g., blogs, twitters, virtual tours, etc.) and static content (e.g., press releases, regulatory filings, etc.), and providing investors with a centralized destination to access information across their target companies. Providing issuers with the functionality to conduct electronic non-deal road shows with qualified      investors.

Background

The DirectMarkets platform was developed by Rodman over the last several years, building on the expertise that it has obtained in completing more than 580 financing transactions for public companies since 2002. During the last decade, capital-raising options and alternatives for public companies have evolved from traditional follow-on offerings to RDs, ATMs and CMPOs. Through this evolution, the issuer has gained more influence over the capital-raising process by acting on shorter notice and reducing its exposure to market volatility during the life of a deal. The DirectMarkets platform is the next and logical evolutionary step in empowering the issuer and bringing access to the capital markets directly into the C-Suite of public companies through an electronic interface linking public company issuers with investors.

Patents have been filed and are being prosecuted in the United States and abroad with respect to proprietary components of the DirectMarkets platform including its trade matching system, interfaces and processes.

In recent years, disintermediation has fueled cost savings, introduced efficiencies, and sparked new business models both within the financial services community and across many other industries. Secondary trading of securities has been revolutionized through automation and technology applications resulting in significantly reduced costs, execution efficiency and disintermediation with market participants gaining direct access to counterparties. Companies such as Instinet, ITG and Liquidnet led the way with industry-changing applications and platforms. However, this disintermediation, and the resultant efficiencies, have largely bypassed the market for primary offerings of securities by existing publicly traded companies, where transactions are still predominantly handled manually, much as secondary trading transactions were in years past. DirectMarkets aims to bring the market for primary offerings of securities by existing publicly traded companies into the 21st century with automation, connectivity and disintermediation, resulting in increased efficiencies and significantly reduced costs.

DirectMarkets’ targeted market is currently suited for transformation. The market is large and highly fragmented. While Rodman is the leader in the PIPE and RD transaction markets, having been ranked the #1 Placement Agent in terms of the aggregate number of PIPE and RD financing transactions completed every year since 20051, our market share still only amounts to approximately 8.3% of transactions completed and represents only 4.6% of gross dollars raised through these offerings. The total PIPE and RD marketplace for U.S. public companies was approximately $27.8 billion in 2011. The complete market for primary offerings of securities by existing publicly traded companies includes PIPE, RD, CMPO, Follow-On and ATM transactions. Capital raised in this market totaled approximately $163 billion in 2011. Every U.S. public company that has in place or is eligible to file a shelf registration statement is a potential user of the DirectMarkets platform. Over the past five years, over 4,000 shelf registration statements have been filed by U.S. public companies.

Given the size of the market for primary offerings of securities by existing publicly traded companies and its fragmented state, Rodman is convinced that directly connecting issuers and investors through a low-cost, efficient and proprietary automated platform presents DirectMarkets with a very significant market opportunity.

Conference Call Information

In conjunction with this release, Rodman & Renshaw will hold a conference call on February 2, 2012 at 11:00 AM Eastern Time, hosted by Mr. Edward Rubin, Chief Executive Officer, Mr. Michael Vasinkevich, Vice Chairman, Mr. David Horin, Chief Financial Officer and Mr. Kevin Lupowitz, the Chief Executive Officer of our DirectMarkets subsidiary. Investors and analysts can participate in the conference call by dialing 1-877-407-9205 (United States) or 1-201-689-8054 (International).

The conference will be replayed in its entirety beginning at approximately 2:00 PM Eastern Time on February 2, 2012, through to 11:59 PM Eastern Time on February 8, 2012. To access the replay of this conference call, please dial 1-877-660-6853 (United States) or 1-201-612-7415 (International) and use Account # 286, Conference # 387096.

The conference call will also be simultaneously broadcast live over the Internet, as well as for replay, and can be accessed through the webcasts and presentations tab of the investor relations section of the Rodman & Renshaw Capital Group, Inc. website located at www.rodm.com. Please allow for some time following the completion of the conference call to access the archive of the Webcast. Allow for time prior to the conference call Webcast to visit the web site and download the streaming media software required to listen to the Internet broadcast.

About Rodman & Renshaw Capital Group, Inc.

Rodman & Renshaw Capital Group, Inc. (NASDAQ: RODM) is a holding company with a number of direct and indirect subsidiaries, including Rodman & Renshaw, LLC.

Rodman & Renshaw, LLC is a full-service investment bank dedicated to providing corporate finance, strategic advisory and related services to public and private companies across multiple sectors and regions. The company also provides research and sales and trading services to institutional investors. Rodman is the leader in the PIPE (private investment in public equity) and RD (registered direct offering) transaction markets. According to Sagient Research Systems, Rodman has been ranked the #1 Placement Agent by deal volume of PIPE and RD financing transactions completed every year since 2005. For more information visit Rodman & Renshaw on the Internet at www.rodm.com.

MEMBER FINRA, SIPC

Cautionary Note Regarding Forward Looking Statements

This press release contains forward-looking statements regarding future events and financial performance including, but not limited to the timing and success of the roll-out of the DirectMarkets platform. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “except,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms and other comparable terminology. These statements involve a number of risks and uncertainties and are based on numerous assumptions involving judgments with respect to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. There are or may be important factors that could cause our actual results to materially differ from our historical results or from any future results expressed or implied by such forward looking statements.

These factors include, but are not limited to, those discussed under the section entitled “Risk Factors” in our Annual Report on Form 10-K, filed March 15, 2011, which is available at the U.S. Securities and Exchange Commission website at www.sec.gov. The forward-looking statements in this press release are based upon management’s reasonable belief as of the date hereof. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

1 Source: Sagient Research Systems, a leading publisher of independent research for the financial services and institutional investment communities.

Contacts

Rodman & Renshaw Capital Group, Inc.

Investors:
Dave Horin, 212-356-0545
Chief Financial Officer
or

Edelman for Rodman & Renshaw and DirectMarkets

Media:
Mike Geller, 212-729-2163

DirectMarkets – 24/7 Company Share Sales

 

The big capital market news today is Rodman & Renshaw’s announcement of the planned launch of “DirectMarkets”, an automated means for companies to sell shares directly to investors.

Like any new capital market development, this announcement was met with some skepticism about its likely success in the marketplace.

Will it operate like a vending machine, available 24/7?

How much control will companies retain on timing and pricing of new issues?

Will listing a company’s shares effectively cap its price appreciation since any demand can be filled with primary shares? And what about the effect on liquidity?

One of my colleagues reminded me of another major capital market development, the dutch auction IPO, used with much fanfare on Google’s IPO five or six years ago.  It’s interesting to note that the recent major IPOs, including Facebook’s planned IPO, use the traditional method, not the dutch auction IPO.

So, we will debate the future of DirectMarkets, but only time will tell.

Link to Rodman & Renshaw’s press release.

If the link doesn’t work, please cut and past the following URL into your browser: http://phx.corporate-ir.net/phoenix.zhtml?c=122722&p=RssLanding&cat=news&id=1655924

The Corporate ATM

dennismccarthy@ariesmgmt.com – (213) 222-8260

Comparing ATMs and Equity Lines

Small cap companies are increasingly using the “at the market” or ATM offering as a means to raise capital in response to a volatile and unpredictable stock market environment.

An “at the market” offering enables a company to take advantage of a receptive stock market to raise capital either by dribbling out its shares over time or by doing a large offering.

How does a corporate “at the market” offering work?    First, the requirements:

In order to create a corporate ATM, a public company must be traded on NASDAQ or one of the exchanges, NYSE, AMEX, etc.

These public companies can register shares for future sale by filing an SEC “shelf” offering.  This “shelf” permits a company to sell its shares in the future whenever it wishes either by “dribbling out” its shares or by selling them all at once.

The shares sold are fully registered so the buyer can resell them whenever it wishes which expands the universe of potential investors and reduces the liquidity risk.

In a typical corporate ATM, the company picks an investment bank (or banks) to be its agent in selling the shares over time.

The shares are sold “at the market” less a small agent fee.

The company determines the timing and amount of shares to be sold constrained only by what the market will accept.

In theory, the shares are sold to long-term holders but there’s no guarantee.

Let’s compare this with an equity line which is another increasingly common means to raise equity over time.

In an equity line, like a corporate ATM, a company files a registration statement for its planned share sales.

In the equity line, however, the company selects an investor to buy the shares.  There is no agent or agent fee. 

This investor, however, will structure the relationship with the company to limit the investor’s risk.

This typically means that the investor will price the shares at a healthy discount to market and may add warrants to sweeten its return.

Also, the investor typically limits the amount of shares it will purchase at any one time.

An equity line investor is typically not a long-term holder but rather intends to resell the shares at a profit.  Stock market fear of this resale volume has been blamed for depressing an equity line company’s stock price and has slowed the growth of this type of offering.

In contrast, as companies come to learn about the advantages of an “at the market” offering, its use is growing.

If you have any questions about “at the market” or other types of offerings, please contact me.

dennismccarthy@ariesmgmt.com or dmccarthy@cca-ccs.com

(213) 222-8260

Living with No Growth

dennismccarthy@ariesmgmt.com

(213) 222-8260

Lately, I’ve been struggling with what it will mean to live in a world of slow to no growth.

First, I tried denial.   There can’t be a world without growth.

Pick up any company annual report or analyst research report, they always project growth.

It’s in our Wall Street DNA.

We need growth to cover our costs, to justify higher salaries, to reward our shareholders?

But, what if, as is now widely expected, we face a global slowdown for our near-term future?

How do we behave in a slow to no growth world?

We’re going to have to rethink many of our basic assumptions. Here are a couple which come to mind.

First, I think cost control will become more critical without revenue growth to bail us out.

Will this trigger a power shift in companies?  Will the path to become CEO now run through accounting?

Second, I think that, without growth, current cash flow is king.  There’ll be more skepticism about the promise of future cash flow.

Will this spark a rash of corporate acquisitions as large, cash-flowing companies gobble up companies with no or low cash flow?

On the financing front, with slow to no growth, will companies borrow more to get as much financial leverage as possible.

Or, will equity securities change?  Will we see more companies begin to pay dividends or do regular stock buybacks to pay a current return to their equity shareholders.

These are just a few ideas.  There are many more potential implications.

Please contact me to discuss the capital markets implications for your company.

My contact information is below. Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

Capitalmarketalerts.com

Slow Road Ahead

Living with slow to no growth

What now? Where can I get capital?

dennismccarthy@ariesmgmt.com

(213) 222-8260

Well, it’s the Fall of 2011, Wall Street has been highly volatile as fears of a new recession and disarray in the Eurozone dominate the news.

As I talk with clients and friends, the discussion always comes around to the question “now what?”  What if my company needs capital?  Where can I go?

First, there’s debt.

The debt markets are open for business.  Based on my experience, finance companies and banks are lending.  The public debt market is open too.

A borrower’s projections may get more “stress testing” now but interest rates are historically low.

Second, there’s asset sales

In part because debt is available, buyers are active. If your company needs to raise cash, you might consider selling a business.

I know companies who’ve raised cash in this manner.  They’ve gotten good prices for the businesses sold and are now deploying the money. 

Third, large cash-rich corporations may be a source of capital for your company. 

Sometimes these relationships take the form of direct equity investments into your company but many times they take the form of JVs, licenses, cash advances or even simple grants.

These deals work when the relationship benefits the large company’s business, even if indirectly. 

Lastly, don’t forget equity.

You may wish for higher prices when selling equity but you should also be pragmatic.  You should ask yourself “how critical is the having cash now?  What is the investment opportunity?  Does it justify the cost of raising equity now?”

Again, my name is Dennis McCarthy.  I’m happy to discuss funding options with you.  My contact information is below.