Happy Holidays, Everyone! December 2011

Is everyone ready for the year to end? Are you going to have stockings with coal or candy? Times like these make us appreciate the little things!

This has been one rocky year but it seems it may be coming to an end. The momentum is starting but this is something we did not have at all last year. We have been dealing with numerous new regulations that stifle much of the entrepreneurial spirit of our market. True to form, however, most entrepreneurs are not letting a little thing like regulations stop them. If you have a great idea and are willing to meet the regulations as you form your company or complete a merger, then this is still the best place in the world to enter the public market. Early on, the new regulations forced many domestic corporations into foreign markets in order to raise capital. Now many of those companies want to come back to the United States. Europe is less stable than the U.S. and Asia is more about improving Asian companies than companies from other places. If you are one of those companies who has struggled here, please do not give up. Grit your teeth, meet the regulations as best you can and (was it the Grateful Dead who said?…) “Keep on Truckin’”! We are entrepreneurs, the lifeblood of the economy, and the mouse that roared!

Most of our companies have actually had a very positive year compared to last year. This is due to putting in the effort to position the company well within the regulatory environment. Gone are the days of not having to keep your information current in the marketplace. If you want your shareholders’ shares to be accepted at brokerage firms and to trade, you must report current information. If you hold shares that are priced below ten cents, and you are not considering electronic processing yet, this might be the time to reverse split your shares to bring them closer to the ten-cent level.

We continue to advocate for our issuers. Blah blah blah

I want to talk about a fes issues that will directly affect our issuers starting immediately. As many of you are aware when the Emergency Stabilization Act of 2008 was signed Cost Basis Reporting became law. For any of our companies who completed a corporate action this year, YOU are required to notify the IRS of the cost basis impact this had on the equity value of your shares. You must report this the earlier of 45 days after the effective date of the corporate action or January 15 of the next year. IRS will penalize you for a mistaken lack of reporting and penalize you more for intentional disregard of the law. Please do not let this go by. A draft of the IRS reporting form is attached for your perusal.

The second issue concerns a new program being promulgated by DTCC that automates the process of billing brokerage firms directly for any DWAC transfers. We have numerous issuers who, rather than argue with and wait for brokerage firms to pay for services, pay the fees for the brokerage firms. As soon as this program is in place (slated for 1st quarter 2012) our issuers will no longer have to pay any of these fees. The brokerage firms will be automatically billed. This will be a blessing for many of you as the fees often reach into the hundreds after starting at $55.00

A movement is now solidly afoot to support a competition-based total management approach to distribution and tabulation of proxies. Recently, the Securities Transfer Association completed a study comparing the invoices of 20 issuers who have shareholder populations ranging from 100 to over 2 million. This study is too long to attach here but it is VERY interesting and will be worth your time to google it on the internet. The name of the study is “2011 Transfer Agent Survey to Estimate the Costs of a Market-Based Proxy Distribution System”. The information just may knock your socks off! To quote part of it:

As a group, these issuers paid Broadridge $3,698,797.85 for proxy processing services. In a system in which an issuer can choose its own proxy distributor, these issuers would only pay approximately $2,097,171.11 with a total savings of $1,601,626.74 or an average of $80,081.34 per issuer.

Except for an issuer with 110 beneficial owner positions, the average transfer agent pricing for providing the same data processing and proxy distribution services as Broadridge would result in very significant cost savings to issuers, ranging from 13% (260 positions) to 80% (105,000 positions), or an overall average savings of more than 42%.

This year we completed two annual meeting proxy votes without involving Broadridge at all for the beneficial side vote. We chose to do ours without first acquiring the NOBO list (usually held by Broadridge) because of Broadridge’s endeavor to take companies away from competent transfer agents. Our efforts evolved into test cases to see what would actually occur without the use of a NOBO list. We ordered a Security Position Report directly from DTCC instead. This report gave the total holdings, per brokerage firm, on record date. It did not give the individual beneficial holders’ names. We had to first send all materials to the brokerage firms to further distribute to their holders.

The regulation says that an intermediary must be used when sending proxy materials to the beneficial side. The brokerage firms are the intermediary between an issuer and the brokerage firm’s holders. No attorney or transfer agent can send directly to beneficial holders without first receiving permission from the individual brokerage firms to do so (through an omnibus proxy.) Because of the burdensome process of distributing proxies to their holders most brokerage firms have hired a broker agent (usually Broadridge.) The regulation says the attorney, issuer or transfer agent must ask who the agent is but it leaves a gray area that the agent of the brokerage firm must be used. Ultimately, it is not the broker’s agent but the brokerage firm itself that is responsible for the distribution of materials and collecting the votes.

We learned a lot from this process by making friends with numerous brokerage houses. We learned, for instance, that much of the materials are sent in electronic form to the email address of those shareholders who receive their statements electronically. Broadridge still charges issuers, however, on the physical delivery of the materials, whether or not they were delivered that way. Electronic delivery (usually in a pdf format) and Notice and Access costs little. Physical delivery is costly and, as most of you are aware, Broadridge is not readily forthcoming with any explanations on the breakdown of their charges on their invoices. Many of you may be paying for physical delivery when Broadridge only sent pdf formats. This is something for you to check.

Our software is now set up to receive votes from the brokerage side. Initially, the brokerage firms had to collect votes from their holders and vote as a firm. By the first quarter next year we should be able to allow access to all of the individual beneficial side holders with a randomly assigned logon and initial password that the holder would change immediately to a password of their choice.

We also have a website that posts your company’s annual reports and proxy materials for a year so that they are always available.

One of our companies had an additional challenge in that some brokerage firms, despite being the responsible party, did not further distribute the materials sent to them to their holders. The brokerage firms also did not want to provide a legal proxy to the shareholders who had accounts at the brokerage firms enabling them to vote. (We suspect, but have no proof, that the main broker agent was involved in these sudden refusals by the brokerage firms.) In this case, the company created a legal proxy for their shareholders in which the shareholder attested to requesting materials from their brokerage and requesting a legal proxy but receiving no proxy and no materials. This proxy from the company allowed them to vote in this instance.

When all was said and done, both of our companies (one was a non-listed company and one was listed) met quorum and both of our companies had their proposals pass. This was a great success in an environment where we were told repeatedly that it would not work.

Because many issuers are starting to buck the existing proxy system, there is a working endeavor in process to create a data aggregation hub where issuers can go to access many types of communication to and from their beneficial side shareholders without compromising confidentiality. This is a wonderful movement that will allow for you to more truly engage you shareholders on important issues. Look more for this in the future.