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New Challenges for the Nano Cap and Small Cap Company

Building a Successful Small Publicly Traded Company is Becoming a Real Challenge


Roy Y Salisbury and Brian Jue


New Challenges for the Nano Cap and Small Cap Company
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Every CEO, CFO, affiliates, and service providers of publicly traded companies should read: OTC Markets; Rule 144; the SPCC on the Securities Law Blog by Laura Anthony, ESQ. “Small public companies are in trouble and they need help now!”

As we are all adjusting to an ever-changing new normal, including pandemic related economic challenges, there are many other business adjustments that need to be prepared for. For nano cap (market cap under $50 million) and micro cap (market cap between $50 and $300 million) publicly traded companies there are regulatory compliance requirements coming that will greatly complicate their regulatory compliance, and in the process increase costs to the point that many will not be able to afford the cost of being publicly traded. This includes how such companies maintain regulatory compliance, raise capital, market themselves, and operate.

The blog post referenced above addresses the following.

  1. The impending amended Rule 15c2-11 compliance deadline (which alone would be and is a clear positive);

  2. the proposed Rule 144 rule changes to eliminate tacking upon the conversion of market adjustable securities;

  3. the SEC onslaught of litigation against micro cap convertible note investors claiming unlicensed dealer activity;

  4. the OTC Markets recent (and across the board) unwillingness to allow companies to move from the Pink to the QB if they have outstanding convertible debt; and

  5. the SEC’s unwillingness to recognize the OTC Pink as a trading market and its implications on resale registration statements.

Our interpretation of these changes includes:

  • We will see a further consolidation of nano cap and small cap companies. As the amount of public companies has decreased significantly over the past decade, these changes will speed up the trend.

  • For years nano cap and micro cap companies have been offered easy financing options that were predatory, non-compliant, and opportunistic that would ultimately be detrimental to the long term viability of the company. To survive, companies using these funds will have to make radical changes in their operations, capital structure, and methodologies.

  • There will be considerable confusion and misinformation throughout these realms of publicly traded companies as the companies and players attempt to figure out how to survive.

  • Nano cap and micro cap companies will have truly little latitude if they do not embrace transparency, good business practices, and financial fundamentals.

  • This will lead to a silver lining in the next 18 months: Fewer compliant publicly traded companies will drive investors towards nano cap and micro cap companies that are compliant, well run and fundamentally strong, increasing their values.

Under our interpretation of these new rules, nano cap and micro cap companies will need to build defensible boundaries to prevent the issues that can jeopardize their compliance, and really their existence as a publicly traded company. For one, companies and their management will need to learn what a sustainable and supportable capital structure is. They will have to learn to understand that spikes in trading volume (especially if it can be tied to any form of promotion) and volatility in general will need to have an explanation as to why. Any type of funding and subsequent shareholder dilution due to variable rate securities that give a discount to the market will have to be avoided.

A significant part of a strong defensive posture for a public company is to have a reasonable and defensible market cap (market capitalization = shares outstanding x price per share) that is supportable based on financial ratios. Is the P/E Ratio (price per share divided by earnings per share)? It is one thing for a major technology company with a billion dollar IPO with an absurd P/E ratio and another for a micro cap (and clearly nano cap) to do so. There is a difference, and it is clearly much easier for enforcement to shut down the nano cap / micro cap level company.

The advantages of being compliant, operating with good business practices and strong financial fundamentals is clear, but shouldn’t that always be what a business aspires to? And how can a company get there, if the business needs capital, support, and experience it does not have?

Many companies shouldn’t even be publicly traded. Those that want to continue being publicly traded, the timing to start the restructuring and reengineering process for a company at this level, is yesterday. It takes time, planning and effort, and the clock is already ticking. Reaching profitability starts with having a plan to get there, with an identifiable time frame that can justify the existence of the nano cap / micro cap company. Acquiring revenue is a solid strategy.

As with change in any industry, there are those who survive and those who do not. Nano cap and micro cap companies with management teams unwilling to make the difficult decisions and in some cases extremely hard calls with expediency, will not survive. Those willing to adapt, embrace change, and understand the need to build real business will have the chance to survive, and even thrive.


Small Business Development Group, Inc. (OTC: SBDG) is a holding company publicly traded on OTC Markets. SBDG has an active mandate to identify and acquire operating companies with a preference for those in the small to medium sized enterprise arena (SMBs and SMEs) based in North America, specifically those demonstrating modest but predictable growth and profitability over time. Ideal candidates for acquisition have an enterprise value between $2 million and $50 million with positive cash flows between $500 thousand and $5 million. SBDG's intent for all acquisitions is to affirm or establish sound business fundamentals and to drive revenue and profitability growth. The goal of SBDG is to develop and align portfolio companies into high performance industry verticals and deliver additional value for its stakeholders.


For more information, go to www.SBDGStock.com




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