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Take It from This CFO: Consider These Rules Before Retaining an Investor Relations Firm

Bennet P. Tchaikovsky is the chief financial officer of VLOV Inc.

Investor relations is an essential function of any publicly traded company. However, if not managed and supported properly, IR can be counterproductive and place CFOs and their company at risk of increased regulatory scrutiny, potential shareholder lawsuits, and increased directors & officers insurance premiums.

I’ve interfaced with numerous IR and public relations firms over the years and have put together a list of considerations for evaluating whether such firms are doing what they should for a company.

Rule 1: CFOs are their own worst enemy when it comes to IR.
Think about it: A CFO, as the corporate policeman, is not the salesperson or the marketing director. CFOs are paid to keep their company out of trouble and on the right path. While a IR/PR firm will look at the glass as “half full,” CFOs tend to view the glass as not only half empty but on an angled table whereby the probability of the glass crashing downwards is significant. Our perceptions as a CFO are not necessarily incorrect and are warranted in certain circumstances; however, this perception isn’t the most marketable. CFOs should not be the ones to start the draft of a press release or to be the overall visionary of an IR strategy.

Rule 2:  IR firm and principal background checks are a must.
I am not advocating a full background check and screening (unless warranted by the circumstances). Rather, use publicly available, quick resources to see if the IR firm and its principals have issues.

Most IR firms are made up of former stockbrokers. The Financial Industry Regulatory Authority has a “broker check” feature on its website that can give a broker’s full history regardless if the broker is currently registered. I also recommend performing a similar search on the Securities and Exchange Commission’s website. Both are free and should be essential steps prior to engaging an IR firm.

To illustrate this point, I’m going to share an experience that a friend of mine (we’ll call him CFO Bob) had and why I will always perform a background check:

CFO Bob started as CFO for a company that had retained an IR firm. CFO Bob didn’t mind the IR firm’s junior associate, but the principal really grated on him to the point where during a road show, CFO Bob asked the principal to leave after the first meeting of the day as CFO Bob felt that something that was not right. Guess what? A year later, CFO Bob went to and looked up the principal’s name that showed numerous complaints the principal had received as a broker.

To be fair, almost anyone can report anything on a broker to FINRA. However, when I have evaluated IR firms, I have found that if there are more than a few complaints or if the few submitted are serious, a problem exists.

Companies also need to complete independent reference checks by talking with former clients that have used the IR firm. Generally, it’s relatively easy to find former clients since their old press releases will be covered with the IR firm’s logo.

Why the importance of references and background checks? The senior stock exchanges (NASDAQ, NYSE) and regulators are greatly concerned with companies that have retained IR firms with a bad reputation. If a company is trying to uplist to a senior exchange and is using or has used an IR firm or individuals that have an unflattering history, a company may have a delayed listing process.

Rule 3: IR firms hired by investors and bankers may not have the company’s best interest in mind.
When financing is completed, investment bankers and investors will demand a budget for IR. Why? The investors have just purchased a significant number of shares and want to generate interest in the company to create stock liquidity. Be very careful when using IR firms recommended by investment bankers or investors that just participated in a company’s financing. Companies come and go from IR firms’ client roster, but developing relationships with investors is an IR firm’s long-term goal and therefore the investors’ interest may be served before a company’s.

Rule 4:  Investor education and stock promotion are two different things.
There is a difference between educating the investing public about your story vs. engaging in stock promotion. For example, when I joined a company that had never published guidance, the IR firm immediately pushed for it. This was so the IR firm could use the guidance to generate interest and find new investors to provide the old investors liquidity. My company provided guidance that we later met; however, in retrospect, I would not have moved so quickly given the company’s inexperience as a publicly traded company.

When retaining an IR firm, make sure that the company and IR firm are on the same page on deliverables so that the IR firm can do its job effectively. Remember: the IR firm can work only with what the company is providing. An IR firm should tell a company up front what it needs to be successful and set a mutually agreed-upon strategy.  This is naturally a push-pull relationship, and if the IR firm is leaning more toward stock promotion than investor education, you as the CFO need to evaluate whether it is time to move on from that IR firm.

Rule 5: IR firms should not be paid in stock.
Most reputable IR firms should not ask for company stock, warrants, or other options as part of their compensation. If an IR firm asks for this, walk the other way. Most analysts and regulatory authorities do not look favorably on IR firms that take stock for compensation. In their mind, the IR firm has gone from a company representative to a biased stock promoter. In my opinion, an IR firm that receives stock has too much temptation to engage in stock promotion instead of educating their investor database about a company – it’s just a conflict of interest.

Rule 6: Social media has not matured enough for every company to use it.
I recently received an e-mail from a former client asking if the company should consider using Twitter, Facebook, or other social media to get the message out now that the SEC has approved the usage of such methods.  My answer to them was “not yet.” While it is legal to do so, a company needs to have the necessary safeguards to make sure that investors receive company news simultaneously as required by Regulation FD.

I think it’s a good idea to get a company ready to use social media to ultimately make news announcements. However, since this is such new territory, let other companies be the first to make mistakes while your company continues to prepare itself for using social media.

Final Thoughts
The investor relations function as it relates to publicly traded companies is an important function but carries significant risk. Background checks, determining if there is any relationship between the investor and IR firm, and watching other companies use new IR techniques first are proven ways to mitigate your risk as CFO and for your company.

Most importantly, the IR firm can only work with what a company can give them. Use interviews with IR firms to create checklists for what a company needs before hiring an IR firm so that the company is getting the most out of its monthly retainer once hired.

Bennet P. Tchaikovsky is the chief financial officer of VLOV Inc. (OTCQB: VLOV). He has served on public and not-for-profit boards as the audit committees’ designated financial expert and as CFO for numerous publicly traded companies, and he has been integral in the uplisting of several companies to the Nasdaq. Tchaikovsky is a licensed CPA and attorney in the state of California and a graduate of Southwestern University School of Law and UC Santa Barbara. He also serves on the board of directors of the Arthritis National Research Foundation and the audit committee of the Long Beach Day Nursery. He can be reached at bennetatwwofficers [dot] com or 310-622-4515.

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