Rodman & Renshaw Capital Group, Inc. (Nasdaq: RODM), via a new subsidiary, DirectMarkets, will unveil an automated state-of-the-art electronic transaction platform to directly link existing public company issuers and investors seeking to transact primary offerings of securities. DirectMarkets will bring unprecedented, cost-efficient access to the capital markets into the C-Suite of public companies and bypass certain traditional roles typically held by investment banks that presently control the transactional process. Both investors and issuers will benefit from 24/7 seamless access to DirectMarkets’ platform through a graphical user interface (GUI) accessible via a desktop or laptop computer, as well as any mobile smart devices such as tablets or smartphones. The official launch will take place at the TradeTech 2012 Conference in New York City that begins on March 6, 2012.
Click below to hear interview with DirectMarkets CEO, Kevin Lupowitz. Full transcript below.
Brett Johnson: This is Brett Johnson in New York City with OneMedRadio. Today, we are with Kevin Lupowitz. He is the chief executive officer of DirectMarkets, which is a new subsidiary of Rodman & Renshaw traded RODM on the NASDAQ. DirectMarkets is launching a new electronic platform to connect investors and growth companies. Thanks for joining us today, Kevin.
Kevin Lupowitz: My pleasure.
BJ: So tell us in a big picture, what is DirectMarkets?
KL: Well DirectMarkets as you mentioned is a new subsidiary of Rodman & Renshaw. For those of the listeners who don’t understand who Rodman & Renshaw is, Rodman has been around for a number of years. Over the last ten years, they’ve been really focused on a very specific niche and that’s raising capital for already existing public companies, specifically in the pipes and registered direct type offerings. In both those offerings, Rodman has been nine of the last ten years, the market leader in this space.
DirectMarkets as I mentioned is a subsidiary is the culmination of a lot of thought that the founders had Rodman had put in understanding how the marketplace works looking at the inefficiencies, frankly, in the marketplace and realizing that every other aspect of financial services has seen innovation through technology. Frankly, looking at the TV saying that at some point there’s going to be some technology innovation in this space too. Frankly, as the market leaders said well we should provide that innovation. So a couple of years ago, they started looking and trying to figure out well what would a technology platform that was going to disintermediate the investment bankers, what would it look like and once they formulated that view, started building that platform. What we’re launching on March 6th next week is the DirectMarkets platform, which is the culmination of all that thought and work.
So how will DirectMarkets work from the point of view the issuing company? Let’s say I’m a biotechnology company and I need to raise $5M now and expect to need to raise $15M over the next two years or five years, how does this change the way I do business?
KL: Sure. Well so if we look at the needs of an issuer, there are a few needs. If an issuer realizes at some point in time that they want to raise capital, one of the things that’s important for them to do on an ongoing basis is to create some awareness so that investors are interested in who they are. So, you know, from time to time, issuers will do non-deal road shows. They’ll get the management team and they’ll pack them up and they’ll go on the road and they’ll visit a whole bunch of companies that their investment bankers think are interesting companies, investors for them to visit. They may create a website. They may put out some press releases from time to time.
One of the things that we’ve done in the DirectMarkets platform is an entire suite of investor relations and public relations capabilities so that an issuer can very, very quickly and easily build a presence for themselves that is going to have the attention of all the investors in our ecosystem. Within that site, they can put up press releases, they can have regulatory filings, they could have videos of management conferences, they could have earnings conferences. If they want to have a virtual tour of a new facility or they want to do some type of presentation of a new drug that’s being developed, they can put all that up there. Behind the scenes, we have some talented IR and PR staff that can help them really create a strong presence for themselves.
If they want to do a non-deal road show maybe instead of going on the road, they can actually film a non-deal road show with their management team. They could put it on the site and then they can direct it to a very wide breadth of potential investors. Then when the investors get it, they can look at this presentation and then they can even send comments back to the issuer and so create some type of two-way conversation that way. I’m sorry, go ahead.
BJ: So what are the economics of this in terms of — is it different than if you hired an investment bank and went out and did some of this, a road show?
KL: Right. So the platform for the issuer is meant to be just that. It’s meant to be something that the issuer can use every single day. You know, and when I talk about the issuer, I’m really talking about the C-suites, the CEOs, the CFOs, the head of the treasury, the IR person of these issuers. They would have a consult that they can get information about their company. They can see what’s going on in the world, what news is related to them, what news related to their competitors, how their stock is performing. Then from there, they can also build their public presence, they can create their non-deal road shows, and if from time to time they decided it’s an appropriate time to raise capital, they can raise capital directly through that platform also. That is one of the values of the connection that the platform provides between them and the entire universe of investors that are also on the platform.
BJ: So how do the economics work? I mean how does the company pay or how are you compensated for providing this service?
KL: So we’re a subscription-based service and we specifically chose the subscription-based service meaning that the issuers pay us a monthly fee for access to this platform. Because we really want to be agnostic as to whether they do deals at all, transactions at all or whether they do transactions with us. So for example, we believe that one of the primary offerings when it’s time to raise capital, a solution that we call Shelf Match, really changes the paradigm of how capital is raised by issuers.
You know, if you think about the way issuers raise capital now, once they filed an effective shelf registration at some point after all the bankers have inundated them with offers to raise capital for them, somewhere down the line they’ll decide that it’s time to raise capital. They’ll pick an investment banker and they give the investment banker some criteria for the type of capital they want to raise and some constraints. But then it’s really up to the investment banker to go out to speak to a number of investors, to bring them over the wall, to try and get the right people involved in the deal and then to get the lawyers involved. It’s a very long tedious process and for that the issuers pay 4% or 5%, 6%, 7%, or 8% in investment banking fees for the deal. It’s very expensive, very lengthy manually insensitive process where frankly only a small subset of the potential investors in the world are even spoken to.
As a difference, through our platform once that effective shelf is registered, our entire universe of investors know that your company has an effective shelf out there, and from time to time can put in unsolicited bids that go directly to the issuer. So the issuer can very passively sit back and look at a wall of bids that are coming in from a huge breadth of investors and can then decide very passively which ones if any they would like to engage.Once they pick one or more to engage with then they’re effectively in a face-to-face conversation kind of like an IM conversation where they’re coming to terms on the agreement. If it’s a simple agreement for a common stock, they could agree right on the spot and the transaction is done. If it becomes a more complex agreement, we have an electronic workflow where if we need to get any third parties involved, any lawyers involved, if we need to wait for a sign off on a board member, those types of things we can have electronic sign offs. We could have all the documents online and we can move them through very effectively through this electronic workflow kind of like when you check out from a retail electronic commerce site like Amazon.com.
So again what this gives the issuer is it lets them kind of sit back in a very different paradigm, let the investors come into them. If they choose this is not the right timing at all, they could ignore them all or they could reject them all. The investors haven’t learned anything. There’s no understanding of why their bid was dismissed. If a transaction happens and it’s a material transaction, for sure it will get reported maybe in an 8K the next day or two days later. But we’re not bringing the investors over the wall that aren’t getting deals and we’re not leaking information out into the marketplace that a deal is going to happen until after the deal is done. Again, we’re doing that at what our typical trading fees more like 1% or 2% as opposed to investment banking fees — I’m sorry 1 or 2 cents per share as opposed to investment banking fees, which maybe 5%, 6%, 7%, 8% of the transaction size. So significant cost savings, that could be an 80% cost savings in many cases.
BJ: Interesting. So how about from the investors’ side and do the investors need to be accredited to use this platform? How does it work for them?
KL: Yeah. So we’re targeting really institutional investors. So these are all prequalified investors. So from the investor’s side, there is also a portal where they can effectively go in and get a view of all of those issuers that are interesting to them. So they could look by sector, they could look by market cap, they could look by who’s done deals, who has open shelves, any number of criteria. They can build up those issuers and if they run through their filter in the morning and they say okay, there are three issuers here that meet my criteria. I haven’t heard of this particular one, they could click through and they could see that site that was built by the issuer and get all of the information about the issuer, learn about them. Then, directly from there, they could put a bid in directly to the issuer.
There’s no guarantee that the issuer will hit the bid or engage in a negotiation, but if nothing else, they’ve sent out an indication of interest that may generate a phone call or it may not. But it gives the investors and many of these investors maybe off the beaten path ones that may not be the ones that would have been approached by an investment bank if the issuer had chosen investment bank to go out and raise capital. You go from many dozens of investors who get the non-deal road shows to hundreds if not thousands of investors who could be potential purchasers of these securities.
BJ: So what is the qualification then to be an investor to participate in this?
KL: You know, any type of institutional investors on day one are going to be the appropriate qualifications. Now the reality is we are going to screen all of the investors. We don’t want investors on the platform who are not going to add value to the issuers. So we want to make sure that these are investors who are not looking to, you know, for lack of a better term, game the system, but they’re looking to truly get on board because they want to engage with these issuers to purchase these shares and to create liquidity for these issuers. So I can’t tell you that we have a firm set of requirements in terms of a screening process, but we will be reviewing every account and making sure that we feel that they’re the appropriate investor for the platform.
BJ: So it’s basically sort of an invitation only type?
KL: That’s right.
BJ: Will there be a fee for the investors to participate?
KL: No. The investors get this for free. So from the investor’s standpoint, this is a fantastic thing because we’re not charging them anything for it other than transaction fees if they do a transaction. Again, that’s in that kind of 1 or 2 cents per share range. But they get an entirely new source of liquidity. So you can imagine if there’s an opportunity for let’s say you’re talking about a traditional long only shop that is already looking at a particular sector and they’re looking to go long in that sector. Maybe there is an issuer out there that they know of but through this platform maybe they learn of an issuer if they already have an outstanding order to fill a large position and maybe this is a thinly traded stock, this is an opportunity to engage with the issuer. Fill up that order directly from the issuer instead of the secondary marketplace thereby injecting that capital directly into the issuer as opposed to buying in the secondary marketplace which has no advantage to the issuer at all. Fundamentally, they like that issuer or they like that sector and they’re investing directly into it, which is relatively unique for many firms that are off the beaten path.
BJ: Interesting. So how does this affect sort of the current markets, the NASDAQ or the New York Stock Exchange or other trading platforms? How does the arrival of your new system affect their business?
KL: I don’t really think — I mean there’s always going to be a secondary market. Once these shares are purchased, they now exist in the secondary market. So the exchanges, the ECNs, the ATSes of the world that do institutional or retail trading, they’re still going to be there to trade those secondary shares. Our platform is not focused on the IPO either. We’re truly focused on already existing public companies that are looking from time to time to raise additional capital, raising their persona in the marketplace and facilitating electronically that trading between the issuer and the investor. That’s really not what those exchanges do.
BJ: Terrific. So you’re rolling this out in March, can you tell us what you see as some of the big challenges and the big milestones for the success of this project?
KL: Well, yeah. So we’re kind of unveiling the platform next week in early March. After that, we are signing investors and issuers as quickly as possible and on boarding them. Our goal for the first year and it’s a relatively aggressive goal but kind of humble is in that first year, we want to build what I’m calling critical mass of both issuers and investors on the platform. I measure critical mass by the number of transactions that are happening.
I would like to in a year be doing at least one transaction per day. I think if we’re doing one transaction per day, that will be a complete validation of the model and that will be a key indicator that it’s time to look at extending the model outside the US and maybe into international markets and potentially looking at other asset classes. So equity is what we’re launching with and after that, I would imagine that we’d look seriously at debt as we look at debt is obviously a very compelling offering for raising capital for public companies.
BJ: Terrific. Well it sounds like a very bold and ambitious project so the best of luck to you.
KL: Thanks, yes. It’s been exciting. It’s been a fun ride so far. But, you know, we’re all very optimistic. We’ve been getting great feedback.
BJ: Terrific. So that is Kevin Lupowitz. He is the Chief Executive Officer of DirectMarkets, which will be launching on March 6 here in New York, a new trading, rather electronic platform connecting issuers and investors. This is Brett Johnson with OneMed Radio in New York signing off.