Board Games The OTC Bulletin Board: a rung on your way up the Nasdaq ladder or the place where small-time players go to be small-time players?

To Will Mullin's way of thinking, his company'shigh-frequency portable scanner is technological silly putty."Everyone who comes in contact with our product envisions anew use for it," says the 31-year-old president of Swarthmore,Pennsylvania-based Longport Inc.

Initially, Mullin says, Longport developed its scanner in theearly 1990s for the wound-care market. "The underlyingtechnology gave us several competitive advantages," saysMullin. "For instance, with a 20 MHz frequency, we were ableto scan much clearer images than were possible at lower ends of thespectrum." Unlike the ultrasound technology used in obstetricsand gynecology, Mullin adds, Longport's device is portable anddigital, meaning the equipment can be taken to the patients and theimages can be sent via e-mail to achieve true telemedicine.

These attributes have created excitement beyond Longport'sinitial target market. Oncologists have used the scanner to measurethe effects of radiology treatments on cancer patients. Sportsmedicine professionals want scanners on the field, andveterinarians see uses in barns, paddocks and pens.

After several years of development and one lawsuit, Longportfinally began rolling out products in October. Because of limitedmarketing resources, the company's initial focus is on thewound-management market. But investors who bet on the company whenit sold shares in a private placement in late 1993 and then begantrading on the Over-The-Counter (OTC) Bulletin Board in 1994, haveenjoyed pretty good returns. Initially traded at 35 cents pershare, Longport's common stock has climbed to a price of about$3. Based on fundamentals such as future sales, Jim McGonigle,Longport's founder and CEO, thinks the company can eventuallybe a $50 stock...perhaps.

McGonigle's doubt stems not from the potential of theproduct or its markets but from Longport's trading venue, theOTC Bulletin Board. "Initially," says McGonigle, "Iwanted to go all the way on the Bulletin Board, to blaze a trailfor others and to show it could be done. But now I'm not sosure we can pull it off."

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Tiers For Fears

McGonigle's quandary raises a good question for othersconsidering public ownership: Should you wait until you meet therequirements of the Nasdaq's so-called SmallCap Market orNational Market System before going public? Or can you survive andprosper on the OTC Bulletin Board?

The answer is that the Bulletin Board might be an ideal provingground, but ultimately, BIZ Experiencess who want to create anembarrassing horde of riches will have to move up in the world.

To understand why this is so, BIZ Experiencess must firstunderstand a little bit more about the structure of theOver-The-Counter market. In general, it's divided into fourtiers. The first three tiers--the Nasdaq National Market, theNasdaq SmallCap Market and the OTC Bulletin Board--have automatedquotation (the "aq" in Nasdaq) and execution systems thatare owned and operated by The Nasdaq Stock Market Inc. Nasdaq, inturn, is owned by the National Association of Securities DealersInc. (NASD), which is the self-regulating body established by thesecurities industry to avoid direct regulation by the feds. Gotthat? (The fourth tier of the Over-The-Counter market has noautomated distribution of quotes, and trading information forcompanies that trade at that level can be found only in apublication known as the Pink Sheets, giving rise to the name"the Pink Sheet market.")

The Nasdaq National Market is where the Intels, Microsofts andCiscos of the world trade. The SmallCap market attractsup-and-comers--all of whom are grooming themselves to move up tothe Nasdaq National Market. The OTC Bulletin Board was formed in1990 to give companies that could not trade on the SmallCap Marketor the National Market (because of their size or because theirshares were not registered under certain U.S. Securities andExchange Commission laws) a market to trade on with automatedquotation, trading and visibility among investors, according toNasdaq's Wayne Lee.

It shouldn't be surprising that the major brokerage firmsfocus most of their attention on the upper tiers of the OTC market.This reality creates significant challenges for the denizens of thelower tiers, as described below.

Perks Of Being Public

It was the OTC Bulletin Board trading venue that Longportascended to in 1994, having completed a private offering of sharesthe year before. In several ways, trading on the OTC Bulletin Boardaccounts for the success, past and future, of Longport.

"Being public and offering investors some form of liquidityor exit strategy played a big role in our ability to raiseadditional funds and commercialize our technology," saysMcGonigle. He estimates that Longport has raised an additional $4million since the company's first offering in 1993. Some ofthis fund-raising has been plain vanilla, such as the sale ofadditional shares of common stock to new investors. Many companiesare able to accomplish this because they price the common stockthey are selling privately at a slight discount to the prevailingprices in the public market, thus enticing potential new investorswith an immediate gain.

In addition, Longport has been able to enjoy a fairly robustvaluation. With 17.5 million shares outstanding at a prevailingprice of $3 per share, Longport is valued at more than $52million--not bad for a development-stage company with fouremployees. And of course the stakes owned by Longport employeeshave made them wealthy, at least on paper, and perhaps someday forreal.

Another benefit to Longport being public is that the companyalready has its exit strategy in place--meaning a way for investorsand founders to cash out if the company succeeds. Many companiesface the real risk of building a successful enterprise and thenhaving the market melt down on them when they decide to go public,scuttling their dreams for public ownership. Companies that comevery close to doing an IPO only to have the IPO window close onthem may never be able to get back, even when market conditionsimprove. They're perceived as damaged goods. "The way wedid it means that regardless of what the IPO window does, we'realready public," says McGonigle. "If the company doeswell, we hope it causes the price of the stock and the value of thecompany to go up."

The Dark Theatre

But it's this latter point that has McGonigle, Mullin andthe rest of the Longport staff worked up. "We're not surethat trading on the OTC Bulletin Board will allow the company toachieve its full valuation," says McGonigle. For instance, thecompany's first-quarter profit of $1.01 million on revenues of$1.23 million, a revenue jump of more than 1,700 percent from thecomparable period a year ago, pushed the stock up nicely but notcommensurately with revenues or earnings.

The problem, says McGonigle, is that as an OTC Bulletin Boardstock, investors can look at you, but they can't touch. Many ofthe major wirehouses have a policy against buying and sellingBulletin Board stocks. This means their brokers can't pitchthese companies to their clients, and their research staffscan't write research on them. "The vast majority of retailinvestors are diverted from even looking at Bulletin Boardcompanies," says McGonigle. Meanwhile, most institutionalinvestors are too big to profitably invest in Longport. While thereare still independent investors and brokers out there who can buyand sell whatever stock they want, there are not nearly enough toprovide an active, liquid trading market for all the Longports ofthe world.

About the only way to overcome this second-class--sometimesreferred to as "designated"--status is to graduate to theSmallCap tier of the market. But in one of the great Catch-22s ofall time, the inability to develop the kind of sponsorship on theBulletin Board that opens the company up to more investors, andhopefully a higher stock price, is also what keeps companies fromreaching the minimum $4-per-share price that is required for aSmallCap listing.

There are several other requirements to getting listed on theSmallCap market, but if share price is the only outstanding issuefor a company, sometimes management will reverse-split thestock--that is, instead of having 4 million shares outstanding at$2.50, the company will "recapitalize," causing only 2million shares to be outstanding, but at a price of $5 each. Thiscan be dangerous, however, because if no new interest is generatedfor the stock, it can drift down to its old level--in effecthalving the value of the company.

The way out for many companies is to hire an investment bankingfirm. Because most firms don't want to work with Bulletin Boardcompanies, an investment banker's priority will berestructuring the company and bringing in new investors so it cantrade on Nasdaq's upper tiers.

Mullin and McGonigle are contemplating such a move butaren't sold on its merits yet. Says McGonigle, "I stillthink the markets should be a democracy. If we succeed, theinvestors should be able to share our success no matter where wetrade."

Next Step

Visit http://www.otcbb.comand http://www.nasdaq.com toreview the listing requirements for each trading venue. Try todetermine how long it will be before your company meets therequirements of the upper tiers of the market, and consider whetheryou can wait that long for public ownership.

Contact Source

Longport Inc., (800) 289-6863, http://www.longportinc.com