OTC Stocks and the ‘Hotel California’ Problem

This is a reprint of my article originally published by equities.com.

Many smaller cap stocks are illiquid compared to their larger cap cousins. 40% of the ticker symbols traded on NASDAQ and NYSE have average daily trading (ADV) volumes of less than 50,000 shares per day, according to the SEC. The median ADV within this group is only 10,000 shares per day. 50% of these ticker symbols have ADV of less than 100,000 shares a day.

Adam Epstein, nationally recognized small-cap expert and author of the “Systemically Overlooked Anomalies of Governing Small-Cap Companies” chapter of the Handbook of Board Governance: A Comprehensive Guide for Public, Private and Not for Profit Board Members (Wiley, 2016), has said that investing in smaller-cap NMS companies with illiquid stock presents the “Hotel California” problem for investors: they can invest in the company, but because of the stock trading liquidity, it’s virtually impossible to exit their stock position: “You can you check out any time you like, but you can never leave.”1

The ability of smaller cap stocks with low trading volumes to attract non-toxic professional investment capital approaches ZERO for reasons illuminated in earlier articles of mine.

Stocks traded on OTC Markets—about three times the total number of companies listed on the NYSE and Nasdaq combined—have two Hotel California problems. The first is that for most OTC Markets traded issuers, their stocks are LESS liquid than NYSE/Nasdaq stocks. The daily trading volumes for many OTC Markets traded companies is in the HUNDREDS of shares a day, i.e., virtually ZERO trading volume. Increasing their companies’ stock trading liquidity was the #1 capital markets priority for 80% of the CEOs/CFOs of OTC Markets issuers in a 2017 survey.2

The second Hotel California problem presents itself in this circumstance: to sell one’s OTC stock (other than in a privately negotiated sale), it is necessary to deposit the paper certificates with a brokerage firm. It is very, very difficult to find a brokerage firm to take possession of paper stock certificates.

Consider this scenario. An OTC Markets issuer raises needed capital in a private placement and sells shares of stock at, say, $.50 per share. The investor receives a paper stock certificate for the shares it has acquired. The company’s business progresses over the next 12 months and its stock price increases to $2.00 per share on reasonable trading volumes. With the Rule 144 holding period having elapsed, the investor decides to sell the shares for what should be a nice 300% gain. The investor call its brokerage firm to sell the shares. Guess what?

The brokerage firm refuses to take custody of the shares, citing the firm’s compliance department as the reason. The investor calls a dozen other brokerage firms and cannot find any that is willing to take the shares.3 The investor is unable to sell its shares to monetize its gain.

This is a very, very serious problem for OTC Markets traded companies. In fact, if investors in OTC Markets traded companies actually knew how difficult it would be to sell their shares, it’s reasonable to think that many of them would not have invested in the first instance.

All is not lost. As noted in my earlier articles on Equities.com, there are lawful and effective strategies for increasing stock trading liquidity. Contact me through LinkedIn at linkedin.com/in/ronwoessner for more information on this topic.


  1. Lyrics to “Hotel California” by the Eagles.
  2. Reported in the 2017 OTC Markets CEO/CFOs survey. The #2 priority was increasing the company share price, and the #3 priority was raising capital.
  3. I’ve been told there is at least one brokerage firm that will take possession of OTC Markets traded shares, and I’m told the sales transaction fees are very expensive.



Capital Raising Made Simple — by Ronald Woessner

Raising money is HARD. It is the hardest task you as a business owner will ever undertake.

Let’s start with some metrics:

  • 57% of startups are funded by founder loans
  • 38% funded by “Friends and Family”
  • 1.43% by banks
  • .91% by angel investors
  • .05% by VC firms
  • Crowdfunding — not yet a significant source of capital for US start-ups, but it’s growing.  According to the article here of StartEngine, one of the largest equity crowdfunding portals, as of February 2019, since crowdfunding inception a few years ago only $176 Million has been raised via crowdfunding.

Even though raising capital is hard, the process is really quite simple. All you need to do are two things:

(1) create the proper tools, and

(2) go looking in the right places for capital.

Relative to point (1), no one would think to build a house without the necessary tools – yet many/most/virtually all inexperienced (and even many experienced CEOs) seek to raise money without the necessary tools.  (More on this topic in later articles.)

Relative to point (2), even though venture capital firms only fund 1/20 of 1% of startups in America, many entrepreneurs automatically think of seeking VC money to fund their start-up.

This is a bad plan, because:

(a) the odds are against you securing VC funding (see metrics above), and

(b) VC firms* are looking for a business that has the potential to become a “unicorn,” and

(c) VC firms* are looking for very specific types of founders and CEOs.

  • typically

Relative to point (b), why are VC firms typically only looking for a business that has the potential to become a “unicorn”?  Because of every 10 deals funded by a VC firm, on average, 3 – 4  deals will go “bust” and the invested capital will be 100% lost; 3 – 4 deals will return only the amount of capital invested or produce a modest return; and, the remaining 2 will produce  phenomenal returns.

Hence, if the VC firm does not believe that your business has the potential to produce a phenomenal return, you’ll never be funded by a VC firm even though  you otherwise have a good business. For example, most entrepreneurs would think a $3M revenue business that grows 50% a year would be a good (even great) business.  Not so a venture capital firm.

Let’s look at the numbers:

Year 1: $3M revenue

Year 2: $4.5M revenue

Year 3: $6.75M revenue

Year 4: $10.125M revenue …

Year 10: $115.32M revenue

Compare this with Amazon:

Year 1: $0

Year 2: $511,000

Year 3:  $15.75M

Year 4: $147.8M

Year 5:  $1 Billion annualized sales

So, you get the point.

Relative to point (c), VC firms are looking for very specific types of founders and CEOs. For example, if the founder/CEO had a successful “exit” previously in a VC – backed venture, chances are good the founder will secure VC funding again as discussed  here.  If the venture has 100% women founders, the chances of it obtaining VC funding are less than the chances of earth colliding with an asteroid.  See my article here published by equities. com. And, the list goes on and one. Again, if you don’t have the attributes they are looking for, you’ll never be funded by a VC firm.

In sum, the two simple rules of raising capital are:

  1. Create the tools you need to raise capital.
  2. Look for sources of capital that might actually fund your business.

We’ll continue this discussion in later posts.

© Ronald A. Woessner, May 5, 2019


Mr. Woessner, of Dallas, Texas, is former Senior Counsel to the Financial Services Committee of the US House of Representatives where he was special advisor to the Chairman for capital formation and fintech matters. He has worked in the smaller-cap company ecosphere for 25+ years in the capacity as general counsel to two NASDAQ-listed companies and CEO of an OTC-traded company that he up-listed to NASDAQ, following private law practice. He currently mentors, advises, and helps start-up and smaller-cap companies raise capital through Regulation Crowdfunding (CF) and other means. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. Mr. Woessner, a certified Toastmaster, is a frequent contributor to equities.com and speaks and writes about US public and private capital markets matters. For more information on Mr. Woessner’s, see https://www.linkedin.com/in/ronald-woessner-esq-3645041a/.

Why Is Austin Such a Promised Land for Food Entrepreneurs? — republished by Ronald Woessner

Article originally published by the Austin Chronicle here.


Why Is Austin Such a Promised Land for Food Entrepreneurs?

The land of milk and honey and consumer packaged goods

Daniel Barnes (Photo by John Anderson)


It’s not the picturesque Hill Country views, or Austinites’ penchant for patio cocktails, or even the gushing venture capital streams that are driving the local consumer packaged goods industry, explains Leigh Christie, senior vice president of Global Technology and Innovation at the Austin Chamber of Commerce.  So what exactly is it that makes Austin an oasis for sought-after consumer packaged goods (CPG) companies?

Austin, an entrepreneurial mecca, finds itself at the delta of a national phenomenon in consumer preference: Consumers are demanding more traceability and simplicity in their products but also more convenience and innovation. People across the country are dreaming up new food-centric products in response, with high hopes of hitting the CPG jackpot, and an uncanny number of the success stories hail from right here in River City: EPIC Provisions, creator of all-natural meat/fruit bars, was born here and then acquired by General Mills; Amplify Snack Brand, which makes SkinnyPop Popcorn, is an Austin native and was acquired by Hershey; Chameleon Cold Brew and Briggo, the on-demand coffee bar, are also local brands. Siete Family Foods, a Mexican-American food brand created by the local Garza family, makes grain-free chips and tortillas, hot sauces, and dairy-free cashew queso, and just received a $90 million investment in February.

Daniel Barnes – mastermind behind Treaty Oak Brewing and Distilling, Waterloo Sparkling Water, and Mighty Swell – suggests that it’s mostly the community’s spirit that’s driving the scene: “I believe that a lot of it stems from a creative base and the creative culture in Austin, and that to me is more important than the VCs that are here.”

Leigh Christie (Photo by John Anderson)


In fact, many of the VCs, or venture capitalists, that fund Austin-based companies are only just beginning to invest their capital into packaged goods. “We’re seeing more VC and active investors wanting to learn about CPG because it’s not something they’ve invested in previously,” says Christie. “We’ve got more and more CPG companies who are relocating to Austin” – thereby raising awareness about the industry and its potential.

The city of Austin’s Economic Development Department calculated the food industry’s total economic impact in Austin to be $4.1 billion, or 0.45% of the city’s GDP, and food manufacturing only makes up $738 million of this industry. Still, “we have a strong need in the market, [and] we’re seeing that grow,” explained the department’s Global Business Expansion Manager David Colligan. Both the city of Austin and the Austin Chamber of Commerce have made the consumer packaged goods industry a target market for economic development, which basically means their goal is to bring more food companies to town.

James Brown (Photo by John Anderson)


So why is it not happening faster? Simple: There are no active incentives from the city for CPG companies looking to move to Austin. Still, the lack of state income tax and oft-lauded “affordable” standard of living make it an attractive place to settle in and build a business. According to James Brown, Barton Springs Mill owner/founder, there are quite a few grants and incubators around town willing to assist upstart companies. “We just won the Austin Food and Wine Alliance Grant,” he explained. “They usually give away half a dozen grants every year to local and regional food and beverage enterprises, ranging from $5,000 to $15,000.” Whole Foodsand Wheatsville also add to the allure, and coupled with the Food+City Challenge Prize and SKU, one of the nation’s leading CPG accelerators, Austin is quite a nurturing environment for introducing innovative products to the public.

South by Southwest in particular has played a unique role in creating buzz around Austin’s growing CPG scene. With every conceivable kind of creator making an appearance during those 10 Festival days, Brown says, “It’s an amazing experience to behold and to see the cross-pollination of all of these different thoughts and ideas. It does certainly have a huge effect on the food scene at that time.”

Barnes agrees, saying, “There’s no denying that SXSW has played some sort of a role in that [growth].” He also maintains that it’s the wealth of imagination, not the money, flowing through the Festival that makes it so influential on local companies. “When you’re constantly surrounded by inspiration and innovation, it just pushes you to drive your own creativity further and further,” he explained.

Creativity culture does not stop when SXSW ends, though. The Clayton Christophers (Sweet Leaf Tea; Deep Eddy Vodka) and the Tito Beveridges (Tito’s Vodka) of the food world greatly influence the development of companies by making themselves accessible. “They still go out of their way to have meetings with people who are on their way up. That responsiveness and that family mentality toward creating products here is remarkable,” said Barnes. Christie echoed his thoughts and explained that the chamber has seen a similar ecosystem being built around these companies because success begets success. “The CPG industry in town seems to support each other very well,” she said. “They seem to mentor, fund, and support one another.”

But while there’s no shortage of great ideas, raising capital is another story. Kirstin Ross, managing director of SKU, explained that convertible notes and angel networks are some of the limited options for companies looking to grow. Familiar names in venture capital firms like Cavu and LiveOak rarely offer financial support to businesses with less than $5 million in revenue, but with more Austin companies attracting the attentions of Fortune 100 companies, some industry insiders are taking it upon themselves to bridge the gap and give more CPG startups a chance. Genevieve Gilbreath recently launched Springdale Ventures, a VC fund that is dedicated to writing $500,000 checks to help companies through the bootstrapping stage. One of their first investments was Mason Arnold’s Cece’s Veggie Co. The hope, she explained, is to give burgeoning companies another option as they scramble to grow during the difficult stage between $500,000 and $1.5 million in sales.

Stephanie McClenny (Photo by John Anderson)


Plenty of Austin companies aren’t looking for explosive growth, though. Brown has turned down offers for investment in Barton Springs Mill and his “exit strategy” is something along the lines of “I don’t know, I’m going to die at some point?” Stephanie McClenny, owner of beloved local jam brand Confituras, created a small, but stable company that is able to weather the fickle winds of consumer taste: “We are a small, quiet company, and we work hard on building community and rely on word of mouth to strengthen our support rather than purchasing it.”

But with consumers’ short attention spans and social media driving people to constantly scour the landscape for the next best thing, Austin must continue to nourish upstart CPG entrepreneurs’ ideas. That’s a surefire way to satisfy taste buds while also boosting the city’s industry growth. After all, as Barnes put it, “The big guys aren’t ever going to be as good at innovation as the smaller guys are.”

Keep up with all our SXSW coverage at austinchronicle.com/sxsw. Sign up for our South By-specific newsletter at austinchronicle.com/newsletters for news, reviews, and previews delivered to your inbox every day of the Fest. And for the latest tweets, follow @ChronSXSW.

A note to readers: Bold and uncensored, The Austin Chronicle has been Austin’s independent news source for almost 40 years, expressing the community’s political and environmental concerns and supporting its active cultural scene. Now more than ever, we need your support to continue supplying Austin with independent, free press. If real news is important to you, please consider making a donation of $5, $10 or whatever you can afford, to help keep our journalism on stands.


VC Funding Is Hard to Come by If You’re a Female Founder — republished by Ronald Woessner

Article originally published by Barrons +++++++++++++++++++++++++++++++++++++++++++++