Creatd ($CRTD): Navigating the Future on the OTC

Published by Jeremy Frommer on July 10, 2024

Life imitates art.

For months, I have been pondering and drafting this paper detailing the crises and opportunities I see in the micro and nano-cap space. On the very same Monday that I planned to publish it, Creatd became an example of everything I’d been writing about.

Just a few days ago, we lowered Creatd’s listing from OTCQB to the OTC. We had to as a result of our 10-K not being able to get filed, due to our previous auditors’ inabilities and staff change issues. We have since filed our 2023 financials and have engaged new auditors.

Most CEOs panic under those circumstances, yet I remain optimistic and keep it in perspective. The silver lining of this is that my thesis is playing out. Like all things, financial markets operate in cycles. I’ve been in the financial world long enough to see them, in full completion, twice now.

And it’s clear to me: history is repeating itself, and if I’m right, we are on the cusp of opportunity.

The Cycle

Market Cycle

I was lucky.

I was nineteen years old when I began trading for Salomon Brothers in 1987. I often think of that time like what London coffee shops were like in the Enlightenment, or Paris salons were in the Jazz Age. There are a few times in history where certain political, social and economic forces converge all at once to make one city, sometimes even one block, a hotbed of innovation that changes society forever.

A Salomon Brothers trading desk in the late ‘80s was that, and I showed up at just the right time.

On Wall Street, the Great Inflation of the ‘70s was followed by massive regulatory rollbacks, primarily the dismantling of the Glass-Steagall Act’s restrictions. “Financial gymnastics” was born. The regulatory freedom spurred innovation in financial products, allowing institutions to blend commercial and investment banking activities. This led to the creation of complex financial instruments and strategies where stocks were transformed into tools for structured product that could be leveraged in creative ways. The Street saw the rise of junk bonds and Leveraged Buyouts. Thanks to the SEC’s passing of Rule 10-b18, companies were able to buy back their own shares and do all kinds of arbitrage. Options, futures, and derivatives became essential for hedging risks and speculating, giving the world new products to sell, buy, bet on, and bet against.

But here’s what happens after periods of rapid innovation: big players leverage that innovation to make massive, outsized amounts of money. That’s what capitalism was built for. And usually when they do, it’s because they are about ten years ahead of regulation limiting them.

But then, typically, comes a crash, because markets always regulate themselves. The innovation of the 1980s led to so many gains with so little regulation that eventually, people became speculative, and the market responded. On October 19, 1987, the world lost $1.71 trillion of value in a single day. That Black Monday was followed by the Savings and Loan Crisis of the late ‘80s and early ‘90s, which led to the failure of over 1,000 savings and loan associations.

The government eventually responded with massive legislative reforms, notably the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). While this prevented reckless behavior by small banks, it also increased their regulatory costs prohibitively, and caused many otherwise healthy banks to find themselves in greatly distressed situations.

At this point in the cycle came the shrewd investors, who found opportunities in those distressed assets, realizing that the assets themselves weren’t bad, they were just subject to bad economic and regulatory forces. So, they began buying and consolidating them. Investors like Wilbur Ross, Warren Buffett, Leon Black, and Sam Zell acquired failing banks, restructured them, and turned them profitable, generating multi-generational wealth in the process. Today, the remaining small savings and loan associations have consolidated into fewer than 500. Once those investors made their incredible fortunes, they used it to invest in innovation, both technological and financial, starting the cycle over again.

The Flashboy Era: Algorithmic Trading and Market Volatility

In the late 2000s, we saw the same pattern.

After 2001, computers had finally gained the processing power to conduct high-frequency, algorithmic trading. This new technology allowed rapid execution and cancellation of orders, exploiting minute price discrepancies. This speed, combined with innovative financial products from the ’80s and ’90s, revolutionized financial markets, but also exacerbated market volatility.

By then, I was at the point in my career where I could take a leadership role in capitalizing on this innovation. I became the CEO of Carlin Financial, one of the earliest high frequency trading firms. It was chronicled in Flash Boys by Michael Lewis, and ended up being sold to the Royal Bank of Canada for $100 million in January 2008.

Just in time, because then came the crash.

While the regulations of the 1980s limited the craftiness of financial instrumentations, there were no laws limiting the speed at which things were sold, and the extremes that they could bring the market to, all based on an algorithmic hunch.

The moment a few investors began shorting the housing market, it was a domino effect, but this time the dominos fell faster and to greater lows than ever before in history. The Housing Crisis of 2007 quickly spiraled into the Great Recession of 2008.

As the cycle dictates, the 2008 financial crisis led to significant regulatory overhaul, notably the Dodd-Frank Act, increasing compliance costs and prompting smaller institutions to merge or be acquired. And again, this resulted in major consolidations, this time of historic institutions. JPMorgan Chase acquired Bear Stearns and Washington Mutual; Bank of America took over Merrill Lynch and Countrywide Financial; Wells Fargo acquired Wachovia.

Just like Buffett and Ross after the savings and loan crisis, JPMorgan, Bank of America, and Wells Fargo generated massive wealth between 2010-2019 by purchasing and consolidating those promising businesses in distressed situations.

Then, innovation struck again.

The OTCQB

In 2010, Cromwell Coulson, the man driving the force behind the then-overlooked OTC Markets Group, introduced a new vision called the OTCQB. He dreamt of a marketplace that bridged the gap between the speculative chaos of the OTC Pink market, and the more rigid standards of the OTCQX, which had become even more rigid after 2008 regulations. Particularly after the Dot-Com bubble, it became an attractive alternative to venture capital for growth funding, and served as a stepping stone for businesses not quite ready for the NASDAQ or NYSE but who wanted access to public capital. After all, companies like Apple, Yahoo, General Electric, Pepsi Co, and Berkshire Hathaway had all been listed on the OTC at different points in prior decades, and found tremendous success later on. Coulson envisioned an exchange that would create a friendlier environment for the the future Berkshire Hathways, as it were, to find themselves, find investors, and grow.

At the OTCQB’s inception, it grew quickly, adding about 50-100 new companies per year. Between 2015-2020, it netted an average of 14 new listings per year, Creatd included.

Change in OTCQB Listings YoY 2016-2023

Then came COVID.

In response to COVID, federal pandemic relief injected the economy with a tremendous amount of liquidity, sparking arguably the greatest inflationary surge since the 1970s. Between 2020 and 2024, the OTCQB added an average of 110 listings per year, where everyone with an idea, qualified or not, brought themselves onto the exchange. In 2021 and early 2022, there was an illusion of prosperity, a dream that was quickly popped by early 2023. Despite the increase in listings after the pandemic, the market capitalizations of the micro and nano-cap space lost more than a decade of growth, falling nearly $500 billion in total market capitalization during the last four years.

The pandemic inflationary surge impacted all markets, but its impact was exacerbated in the micro-cap space because of the nature of “meme stocks”, a phenomenon exclusive to these companies. When micro-cap stocks rose rapidly in 2021, the retail community on Twitter, Reddit and Discord rallied together to swing some popular stocks up, swelling an already-illusive picture of gains painted by free inflationary money. Game Stop is a famous example.

We weren’t exempt. Creatd got caught up in that meme stock craze, soaring our market capitalization to $200 million at one point. As great as it was for a period of time, it didn’t last. Over the last year and a half, naked short selling has run rampant, done so at the speed of high-frequency trading. Algorithms have been fire-selling stocks on a feeling, trading without any notice to the company underneath. Market makers have consolidated to control the sentiment of entire industries with just a few trades. In all this, our own market capitalization fell by 99%.

As is part of the cycle, and in response to the crash, the regulators kicked in. Instead of focusing on how technology could be modified to make it less volatile for small companies, they created an even more difficult regulatory environment. Earlier this year, and particularly in response to the BF Borgers case, the PCAOB and SEC have rolled out a series of new auditing regulations nearing ever-impossible standards, becoming more stringent on micro-cap companies. The team at Creatd has been through public audits for our entire careers, and not once have I seen an audit as difficult, exacting, and impossibly demanding as my 10-K of 2023.

Because our auditors could not file our 10-K by the end of June, we were faced with either going to the expert market for failure to file, or filing our 10-K without an auditor’s opinion and going to the OTC, until our new auditor could start our 10-K all over again from the beginning. Once it’s complete, in about three to four months, we’ll be back on the OTCQB.

The perversity, but also maybe in some way, the opportunity, of all this is that despite our market capitalization plummeting and delisting from the Nasdaq to the OTCQB and now to the OTC, our tech has only gotten better. We’ve added new features and millions of new users. We’ve lowered our customer acquisition costs significantly while increasing our revenue. Vocal’s comps are valued at over 100 times Vocal, even though they generate annual revenues not much better than ours.

Nothing about our stock price has reflected any of the potential or gains in our incredible, world-class tech. We are seasoned operators, and this economic and regulatory environment nearly brought us to our knees. What is it doing to the brilliant technologists, trying to navigate these waters without decades of regulatory experience under their belts?

For the most part, I think the OTCQB fulfilled its original mission. There are good companies with strong technology in the space, some of which I believe have the potential to be the next unicorn. After all, Vocal grew with capital raised on the exchange. I can think of a few more I have my eyes on, many with incredible business models, but who are debilitatingly distressed, if they can survive at all.

Now begins consolidation.

The Future of Creatd: Consolidation and Capitalization

Just like Warren Buffett consolidated distressed banks and insurance companies in the early ‘90s after the Savings and Loans Crisis, Creatd will become a vehicle to consolidate the market of promising small, micro and nano-cap companies who have become synthetically distressed by the current capital-poor, over-regulated environment.

Two years ago, in our 2022 annual meeting, our shareholders voted to increase our authorized shares to 1.5 billion. As of the end of June 2024, we have a mere 3.5 million shares outstanding, trading at about $1.75 per share. My vision is to use our war chest of public equity to make accretive acquisitions in the space, both of private and public companies.

Our focus is to buy minority-stakes of revenue-generating companies, in order that they don’t become subject to the regulatory hurdles of being public, but whose revenues can still improve our balance sheet at Creatd. In exchange, our new portfolio companies (and their original investors) will receive shares of Creatd, as well as our combined decades-worth of regulatory and executive expertise in the public markets.

The new model at Creatd will function much like a private equity or venture capital firm, only using our stock as our primary currency. Notwithstanding our 2023 10-K debacle, once we are back on the OTCQB, our vision is to immediately uplist onto a national exchange, increasing the value and hopefully decreasing the volatility of our stock, benefitting our both our direct investors and also the new shareholders in our community: smart entrepreneurs with growing products.

As far as Vocal, our plan is to sell a majority stake to private investors, freeing it to grow quickly and flexibly. Its resources will be used to hire new people, to pay for development of new features and for its supporting tech stack, not to fund auditors, lawyers and lenders. Creatd will own a minority of Vocal, releasing it from having to be rolled up into public audit each year. We will do the same with the OG Collection.

In the meantime, I still believe in Coulson’s original vision of the OTCQB, but it needs a systemic overhaul. We are going to find like-minded management teams and organize ourselves into a coalition that will advocate for regulatory change. We envision change that will allow young companies in the capital markets an opportunity to actually grow, that won’t suffocate them before they take their first breath. We will arm them with the advice and resources they need to navigate the labyrinthine, sometimes nefarious forces working to take advantage of them in this space. Our goal is to fight for a system that is fairer than this, to companies, founders, and investors.

Creatd’s story is far from over. I’d argue we’re on the brink of the greatest moment that will define the public markets for decades ahead. Because of that, I’m not worried about our recent OTC listing, confident that it will be, at worst, a blip in our history, and at best, the beginning of monumental growth. We are united with our shareholders and determined to recover multiples of what we lost. As years past have shown us, the more distressed the environment, the more opportunity there is.

The resilience that my team and I have developed in this space, a skin far thicker than I could have ever imagined, will be our strongest asset to ourselves, our shareholders, and to other companies. We will redefine the boundaries of the small, micro and nano-cap market, building a scalable, defensible, and value-driven enterprise along the way.

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Jeremy Frommer

Founder, CEO, Chairman