Retail IR Therapy: How to Attract and Keep Shareholders

For a variety of reasons, it is increasingly difficult for small companies to identify, attract and sustain interest from retail investors. For mid and large cap companies, the challenge is how to efficiently serve the needs of the retail crowd without depleting scarce resources needed to cater to the institutional community.

In this issue of IR focus, we take on these topics with a view to helping companies of all sizes effectively manage the demands of creating and/or nurturing the smaller shareholder class of investor.

Retail Marketing for the Small Cap Company

Hundreds of public companies in Canada today are too small to qualify for membership in an index, which would put them on the radar screen for institutional investors; consequently these companies are too small to be of interest to bank-owned brokerage firms. Yet they need capital so that they can grow – a need that is often exacerbated by lack of free cash from operations. The only survival mechanism is to hunt for capital from retail investors.

While the tendency is to move straight into no holds barred promotion, experts in the small cap space say the smart approach is to first create an investment story that illustrates why the company is/will be retail investment worthy. This narrative should be grounded in a business plan that establishes corporate development milestones (actions that are specific, realistic and time-bound) and dimensions the available market and trends therein.

To provide a plausible (and factual) answer to the question ‘why invest’, it is necessary to develop the USP – unique selling proposition. A USP might be a novel product concept or a potentially fertile plot of land, or it might be a company’s relationships with other companies or high-profile executives who have lent their names to serve on corporate (or advisory) Boards. All of these factors can fuel a series of USPs that can be marketed over time.

Simply being part of a fast-growing industry such as financial technology might be enough to initially capture the imagination, but even then, the only way to secure funding is by articulating an investment story that resonates with prospective investors and executing the business plan to meet investor expectations.

While developing such a story and then formulating an IR plan with a 12-month activity calendar can consume time that many small caps believe they can ill afford, experts agree that bypassing these steps will substantially weaken any chance of success.

Part of the IR plan should be devoted to targeting strategies: in other words, identifying ways in which prospective retail investors will be identified and courted for outreach purposes. A well-worn strategy is to leverage the personal contacts of every current investor, every employee, every Board member and every supplier to uncover the names of prospective investors. This takes legwork as well as discipline and can be aided by hosting social functions where the company’s strengths/opportunities are featured.

In the absence of brokerage firm analyst reports, some small companies resort to creating their own research as a means of informing the public. This can be of value if the research is perceived by prospective investors as informed, informative and no more promotional than brokerage firm reports. Issuers should remember that forward-looking information contained in such research reports, including financial outlooks or future-oriented financial information, will subject them to disclosure rules, including reasonable cautionary language and a description of the material factors or assumptions that were applied. Accuracy is essential to avoid any misrepresentations for which the issuer, its directors and officers could be liable.

Outreach to the brokerage community, while difficult, remains a must and despite recent brokerage firm closures, there are still independents that engage with small cap companies. Again, having a cogent investment story will help to attract broker interest.

How much can be accomplished on a do-it-yourself basis? The answer is a fair amount, but it is always advantageous to have cash to spend to augment internal efforts. Where can that cash be deployed? It is up to each company to make that decision, but there are multiple choices, including hiring an IR firm that specializes in small cap outreach (fees can range from $5,000-10,000 per month), or paying to present to members of investment clubs. In making these decisions, it is advisable to speak to public companies that have used the same external services and treat every event undertaken not as a one-off, but a starting point for building relationships with prospective investors met during the process.

Inside an IR plan for a small cap company should be a section on attracting interest from a source that has great influence on retail shareholders: the media. This should include traditional media – even though the news holes for newspapers and television networks are shrinking – and social media. Here again, courting the media should not be thought of as a tactic but rather a strategy consistently applied over time.

To generate media interest, it’s necessary for a small cap company (in fact most companies) to set aside blatant corporate promotion and instead develop pitch-ready story angles that link their investment stories to a larger societal or business trend, or to cast the CEO as an opinion leader in an emerging or important field. Generating social media interest through blogs, tweets or something in between will have a far bigger impact if the content isn’t blatantly promotional but rather informative and relevant to the largest possible audience. Like all other forms of outreach, social media should be cultivated over time via a sustained effort.

Learning from the practices used by successful small cap companies is also valuable. TSX Venture-listed stock Tio Networks Corp. is one example. It employs blogs, Facebook and Twitter, generally has an online presence that is as professional as any large cap stock and was recently featured in The Globe and Mail’s Report on Business. It also happens to have a large analyst following, despite its size.

All of these suggestions presuppose that a company is listed on a stock exchange. Going forward, start-ups and perhaps even more established companies may look to crowdsourced capital as an alternative, particularly after Ontario became the latest province to open the doors to this funding approach in early 2015.

New crowdfunding rules require the registration of ‘funding portals’ and other investor protections and limitations such as caps on how much capital an individual can risk. Companies participating in this marketplace will also be prohibited from advertising and be held to account for misrepresentations. However, once any company – listed or otherwise – seeks to take capital from third parties, many of the best practices noted above are still relevant.

Retail Shareholder Communication for Larger Caps

For larger cap companies, the challenge is not attracting retail shareholders; it is managing the needs of those shareholders, many of whom do not use professional investment or tax advisors.

The best approach is to ensure the corporate website is used as a repository of all the information a retail shareholder will need to make an informed investment decision. This includes the mechanics of all the securities in the company’s capital structure. For example, if rate-reset preferred shares have been floated, consider extracting details of how these work from the prospectus and including them on the website in layman’s terms. For dividend-payers, ensure the associated web page is up-to-date and provides key dates (record and ex-dividend included).

Companies originally floated as income trusts would also be wise to consider using the website to add content not originally found in the IPO prospectus. For example, corporate growth strategy discussions were not a prospectus staple of most income trust IPOs but are a key consideration for stockholders today.

All of this content should reduce inbound call volumes to the IR line. Similarly, using a dedicated IR email inquiry address will also reduce time spent in responding to shareholder questions.

ETFs (and before them, mutual funds) siphoned off considerable retail investor activity – and the traditional conduit to the market (the small brokerage firm) is shrinking. Still, the fact is that independent risk capital remains available in Canada for those who know how to find it.

Where To Get More Information