Board Games

The Dark Theatre

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

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

About the only way to overcome this second-class--sometimes referred to as "designated"--status is to graduate to the SmallCap tier of the market. But in one of the great Catch-22s of all time, the inability to develop the kind of sponsorship on the Bulletin Board that opens the company up to more investors, and hopefully a higher stock price, is also what keeps companies from reaching the minimum $4-per-share price that is required for a SmallCap listing.

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

The way out for many companies is to hire an investment banking firm. Because most firms don't want to work with Bulletin Board companies, an investment banker's priority will be restructuring the company and bringing in new investors so it can trade on Nasdaq's upper tiers.

Mullin and McGonigle are contemplating such a move but aren't sold on its merits yet. Says McGonigle, "I still think the markets should be a democracy. If we succeed, the investors should be able to share our success no matter where we trade."

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This article was originally published in the January 2000 print edition of Entrepreneur with the headline: Board Games.

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