Cellectar Biosciences is trying to move from an over-the-counter (OTC) stock to trading on the Nasdaq stock exchange—and the stakes are high for the small Madison, WI-based biotech.
Winning approval to join the Nasdaq stock exchange could give Cellectar a boost in bringing its cancer drugs and imaging products to market—assuming the company can capitalize on the opportunity. And at the very least, Cellectar would raise its profile in both the investment and research communities by moving into the big leagues of a major exchange.
Whether it’s fair or not, small companies whose stock trades OTC often are associated with penny stocks—a “pejorative term,” says Eric Blanchard, a partner with law firm Covington & Burling in New York. As “The Wolf of Wall Street,” last year’s raucous Martin Scorsese flick, vividly describes, penny stocks can be manipulated in fraudulent “pump-and-dump” schemes.
But many OTC stocks can’t be tarred with the same brush as dubious penny stocks, adds Blanchard. (The SEC defines penny stock as securities issued by small firms that trade at less than $5 per share, generally OTC. Others set the threshold at $3 or $1 per share.) Indeed, for many small private companies, which don’t have enough visibility for a splashy IPO on a major exchange, trading their stock OTC is a logical next step for raising capital after the family and friends stage, despite the negative perception, says David Krause, a Marquette University finance professor and director of the Milwaukee school’s Applied Investment Management program. “Not every stock is Google or Apple; they have to start out oftentimes raising money where they can, and it may be in the penny market,” he explains.
Biotech and software startups sometimes go the OTC route because they lack the tangible assets, like industrial manufacturing equipment, that can be used as collateral to more easily obtain financing, he says. Or they can end up as an OTC stock as the result of a merger, as in the case of Cellectar. The once privately-held company was acquired in 2011 by Newton, MA-based Novelos Therapeutics, which was already an OTC stock, and which moved the headquarters of the combined company to Madison, where Cellectar was based.
It’s not the preferred path, Krause says. “Firms would try to avoid it if they could because of the connotation.” He equated it to hawking wares at a pawnshop. “It doesn’t mean you’re a bad person and that the money you’re raising isn’t valid, it’s just not the normal route that people—or in this case, businesses—go to raise money.”
That’s why some ambitious executives view trading OTC as a way station on the path to better things. Making the jump to a major stock exchange opens the business up to more liquidity and a bigger pool of investors, says Matt Rossiter, a corporate partner with Fenwick & West in San Francisco. And given investors’ recently revived interest in biotech companies (although the biotech IPO market might be cooling), now might be a good time for the sector’s startups to try to “up-list” from trading OTC to the Nasdaq—the home of most small, publicly traded biotechs. “It helps because investors are more aware of the sector and more optimistic about its prospects,” Rossiter says.
Cellectar’s executives and investors hope he’s right. The company recently enacted a 1-for-20 reverse stock split and announced it had applied to trade on the Nasdaq Capital Market, while also planning a public offering of additional shares. The firm awaits
