A CSOP is a dolled-up Direct Stock Purchase Plan (DSPP), something transfer agents have offered since 1972. Hundreds of U.S. companies offer DSPPs to registered shareholders who invest with relatively low fees and get the long-term benefits of dollar-cost averaging.
Loyal3 has ingeniously updated the DSPP for the Web 2.0 generation: three clicks, pay with a credit or debit card, a minimum initial investment of just $10 compared to $50 to $1,000 for DSPPs, and even a Facebook app. Above all, investors don't pay any transaction fees to buy or sell; the company issuing the stock pays the costs.
Why Companies Love It
In the right hands -- both the issuer's and the investor's -- this is a slick way to build a long-term, stable shareholder base while boosting sales. Loyal3 cites an old study from Bain & Company and Stockpower, a Loyal3 antecedent, showing that customer-investors, or "investomers," spend 54 percent more on average than regular customers. They're also more likely than other investors to hold onto a stock when it tanks.
A lot of companies will jump on the idea. Certainly, NASDAQ did. It has partnered with Loyal3 to market CSOPs to its listed companies, and NASDQ OMX Group itself will be the first to launch a CSOP for retail followers this summer.
The time is right for a renewed focus on retail investors. Corporate governance changes since the financial crisis combined with changes in proxy voting have put more power in the hands of institutional investors. Companies looking to reelect directors or win shareholder approval for executive pay plans want loyal retail investors on their side.
In fact, a CSOP is more about marketing than investor relations. It takes the tradition of shareholder perks -- coffee vouchers with your Starbucks annual report or preferential pricing on Ford cars -- and turns it on its head: instead of showering products on shareholders, a CSOP pushes shares to customers.
Some companies will use CSOPs to give shares away to loyal customers, as Stamford, CT-based Frontier Communications is planning to do.
The downside for companies could be the cost in time and money of dealing with retail investors. The proportion of U.S. companies' stock held in retail hands has been declining steadily over the years to less than 30 percent today. Many seem happy with all but a tiny fraction of their shares in institutional hands. Not all companies will be eager to win back pesky individual investors.
A Recipe for Disaster?
But there's a danger looming for fresh young investors of the Facebook generation, who missed being burned in the last internet bubble, sat out the financial crisis in their dorm rooms, and weren't even alive for 1987's Black Friday. They may use Loyal3's Facebook app to invest in potentially risky stocks as casually as they "friend" each other and "like" bands or silly cat clips.