Today’s Wall Street Journal has a must read op-ed titled How to Revive Small-Cap IPOs The op-ed was written by our good friend David Weild from Grant Thornton. We have used our morning note in the past to feature some of David’s work such as his white paper, Why are IPO’s in the ICU? and also many of his appearances before the powers that be in Washington, DC. David knows a few things about IPO’s. In addition to his work at Grant Thornton, he runs his own company called Capital Markets Advisory where he advises small companies on capital raising issues. He was also the former Vice Chairman at Nasdaq and was responsible for all listed companies.
In the op-ed, David reveals some startling facts:
- The median equity value of a U.S. publicly traded company is only $450 million
- 70%-80% of publicly listed companies are considered small cap or smaller—under $2 billion in market value.
- The share of IPOs smaller than $50 million fell to 20% in the last decade—down from 80% in the 1990s.
- Intel went public in 1971 with an IPO value of only $8 million
David is calling for a “new, parallel market for public companies under $2 billion in value”. And here is why:
“One-size-fits-all stock trading has become a disaster for all but our nation’s largest companies. Our rush to cut trading spreads and commissions has made large caps even more active—but we’ve abandoned the entrepreneur in the process. These are the people who take on most of the business risk and job creation in this country. With such inhospitable stock markets, mergers and acquisitions have become virtually their only outlet to realize value for their hard work.”
“What’s needed now is a new, parallel market for public companies under $2 billion in value. Trading rules in this new market would allow for higher commissions, which would provide adequate incentives for small investment firms to get back into the business of underwriting and supporting small-cap companies. The SEC could use its authority under securities laws to exempt this market from rules standing in the way, or Congress can step in… It would allow issuers to choose the market option that makes the most sense to them while other established markets continue to operate as they do today.”
Now this is real choice. The corporate issuer would get the choice on which market they would like to list. Our current market structure does not have real choice even though there are 13 exchanges and over 40 dark pools. The reason is that all these venues are essentially doing the same thing. Our current fragmented market structure is filled with built in arbitrages that are set up to reward the high speed trader but in the meantime it has all but forgotten the corporate issuer. Under David’s plan, a new market (not just another new exchange) would be formed. This new market would attract real liquidity by bringing back economic incentives for true liquidity providers. Imagine that, a stock market that has the goal of helping small companies raise capital so that they could become larger companies which would create jobs and revive the economy. It sounds like that is the real reason that a stock market should exist. We think the SEC and the politicians in DC need to seriously consider this proposal. It’s time to take a look at the Frankenmarket that has been created over the past decade and now offer a real alternative.
We’ll leave you with this quote from David:
“This solution responds to the Jobs Council’s concerns and adds real substance, process, clarity and shape to the rebuilding of our IPO market. It would allow issuers to choose the market option that makes the most sense to them while other established markets continue to operate as they do today. Most important, it would reignite the job-creation engine that once made U.S. stock markets the envy of the world.”