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Welcome to Episode 51 of Special Situation Investing where we accelerate your stock market research with our own brief investment write-ups.
Today we revisit OTC Markets and the company’s recent acquisition of EDGAR Online. If you haven't already listened to our previous OTCM write-up please do so as it provides a broader background on the company and its history.
Human nature drives most people toward the path of least resistance. When offered a complex and costly option or a simple and straightforward option, its the simple option that people pick. We believe that this timeless quirk of human nature is one of the drivers behind OTC Markets success and that the companies recent EDGAR Online acquisition will add one more push to the company’s already well established flywheel.
To understand why human nature's bent toward the “easy button” benefits OTCM we should look at the company from three distinct perspectives. The regulator’s perspective, the trader’s perspective, and the companies’ who seek access to public markets perspective.
Beginning with the regulator’s perspective, it’s useful to understand that certain companies act as control levers that assist regulators in their quest to regulate markets. Banks, credit rating agencies, exchanges and others all come to mind as pieces of key infrastructure within the financial system. The roll of these key pieces of infrastructure are most readily seen during times of crisis.
During the 2008 financial crisis regulators adjusted interest rates and leverage requirements via the banking system, decided which companies would fail and which would receive government bailouts or buyouts, and opened and closed trading platforms as the need arose. All this to say that the regulators used specific companies in specific sectors as a mechanism through which they could regulate markets.
The regulators dependence on these companies was evident in the fact that the rating agencies came out of the crisis unscathed despite the fact that they had failed to raise the warning flag on the bad credit instruments that sat at the center of the financial meltdown. Again, because the regulators needed to pull the levers that the banks, exchanges, and rating agencies represented they had no interest in punishing or closing those very same companies even when the companies themselves were culpable for some of the damage.
Because whole books were written on this topic, I won’t belabor the point here other than to highlight that highly regulated companies that represent critical pieces of financial infrastructure are the very same companies that look like the easy button for a regulator in crisis. The last thing the SEC or FINRA want to do in times of crisis is to dismantle the very same companies they’ve regulated for years and with whom they’ve built longstanding relationships.
In fact, just the opposite is true in that the regulator will more deeply partner with the company so that they can effect their desired outcomes in the market. Being the easy-button for regulators adds to the strength of OTCM’s business model to the extent that OTCM is viewed by the regulators as an extension of the regulators’ own toolbox.
The second perspective to consider is the trader’s perspective. Traders and brokers want to avoid scams, easily access accurate information, and have that information on a platform that’s simple and easy to use. Each of these requirements is supported by and monetized by OTCM. OTCM walks each company through a FINRA authorized disclosure process prior to listing a company on its platform thus ensuring the compliance of each of the companies listed on behalf of traders and brokers.
Ensuring that traders and brokers have access to accurate and timely information is accomplished by repackaging and marketing compliance data provided by the listed companies themselves. In other words, the compliance data generated in one division of OTCM becomes the repackaged trading information sold to traders and brokers in another division of OTCM.
OTCM is continually working to improve the breadth and the quality of information available to traders and brokers and it increases the value of that data every year through organic growth and through acquisitions like BlueSky and EDGAR Online. This line of business becomes the easy-button for traders and brokers in much the same way that Bloomberg terminals have entrenched themselves among professional money managers. Information that could be freely accessed on a range of separate platforms can be orders of magnitude more valuable when combined on a single easy-to-use platform and that information can be converted into significant revenue for whichever company distributes the packaged data.
Finally, we must also consider the perspective of a company that wishes to access public markets. CEO’s and company founders are extremely busy and may not have time to pursue a public listing. Furthermore, an opaque regulatory environment can be intimidating to a management team that rightly fears running afoul of regulators. For this group, OTCM is the easy button because it provides a simplified path to access public markets and ensure regulatory compliance.
Rather than reinvent the wheel by applying for a public quotation with FINRA, an often drug out, back and forth process, a company can in one step provide the required information to OTCM and receive confirmation of eligibility along with a date to begin trading in one simple, compliant, single-day process.
To bring it all together, OTCM makes the regulatory, compliance, listing and trading process easy for three distinct parties that include regulators, corporations, and traders. This is why the company continues to tout the positive impact of the amended SEC Rule 15c2-11 that took effect in September of 2021. The rule codifies public company listing and compliance requirements, exchange definitions and guidance, along with guidance for brokers that all entrench the need for OTCM as a business and which make OTCM the chosen platform for all three parties to ensure that their own needs are served in the easiest way possible.
OTCM’s recently completed EDGAR Online acquisition offers the company another trading information dataset that, when combined with their existing trading data, will be worth more than the sum of its parts. The EDGAR Online purchase strengthens OTCM’s business model from the trader’s perspective while the BlueSky acquisition strengthens the model from the regulatory and company compliance perspective.
In essence, the companies flywheel is to act as the easy-button for companies that wish to go public, traders and brokers seeking accurate and well packaged market information, and regulators tasked with securities oversight. With every turn of the flywheel OTCM entrenches itself as a well regulated toll bridge that sits on an SEC regulated three way intersection. Adding to the already significant advantages of the business model, the company has very few employees or capital expenditures and is debt free. While not exactly a special situation the business model is strengthened by its recent acquisition and is worth a second mention on the show as the company will do well in any environment but is particularly advantaged in volatile markets or against a backdrop of steadily rising prices.
With that we wrap up Episode 51 of Special Situation Investing. We hope that you’ve gained a better understanding of business model analysis generally and OTCM’s unique traits, specifically, after listing to this episode. Thanks again and we’ll see you again next week with another episode.
SUBSTACK-ONLY BONUS
Check out Monish Pabrai’s 2016 article on “Uber Cannibals” and his list of the top 5 Uber Cannibals that he updates yearly. While on his website, also check out his “Free Lunch Portfolio” where he lists “shameless cloners,” “Spawners,” in addition to the five Uber Cannibals. More than the specific stocks, pay attention to Pabrai’s thought process.
OTC Market's EDGAR Online acquisition (OTCM)