INDEPENDENT RESEARCH

Small and Micro Cap companies in the public arena are falling victim to a recent trend in the Independent Research sector. New regulations imposed by the NASD prohibit revenues generated from investment banking activities from being used to fund research initiatives. Financial institutions must now rely on brokerage commissions to support their research operations. Drastic declines in traditional brokerage fees due to the proliferation of online trading platforms have forced Wall St. research departments to scale back their operations and cover a fewer number of companies. Unfortunately, the first companies to get cut are the ones with the greatest growth potential - companies with market capitalizations under $100 million.

In light of these changes the SEC has taken a pro-active stance in the promotion of issuer-paid research for smaller public companies. The following excerpt from a report by the SEC's Advisory Committee on Smaller Public Companies outlines the reasoning behind their support for issuer-paid research.

"The trading markets for public companies are assisted in great measure by the dissemination of quality investment research. Investment research coverage for public companies in general, and for smaller public companies in particular, has declined dramatically in recent years, however, as economic and regulatory pressures have led the financial industry to dramatically reduce research budgets.   The problem is particularly pronounced in the case of smallcap companies, of which less than half receive coverage by even a single analyst, and in the microcap universe, where analyst coverage is virtually nonexistent.

The existing regulatory framework and business environment exacerbates this problem, and commission rates have declined for firms that historically used these revenue streams to fund research. Business models have emerged to create published research in order to fill the resulting void, although their involvement with independent research providers that also participate in the global settlement agreement has until recently been uncertain.

A lack of independent analyst coverage has several adverse effects, both for individual companies and for the capital markets as a whole:

• companies with no independent analyst coverage have a reduced market capitalization in comparison with companies that do have such coverage, and are subject to higher financing costs when compared with their analyst-covered peers

• a lack of coverage by independent analysts limits shareholders' and prospective shareholders' ability to obtain an informed outsider's perspective on identifying strengths and weaknesses and areas for improvement;

• the lack of coverage lessens the entire "mix of information" made available to investment

• bankers, fund managers and individual investors, which make markets less efficient; and

• because analyst reports trigger the buying and selling of shares, the lack of such reports frustrates the formation of a robust trading market"