What if we were to start with a blank slate? Forget about everything that currently exists in the public markets for MicroCap and emerging growth companies. How many more times do we have to hear investors complain about liquidity? How many more times do we have to hear about how much red tape issuers have to overcome in order to become and maintain a public listing? Investors are clamoring for new and interesting ideas, and yet, management of these companies are reluctant to look to the public markets to raise capital, not because there’s no aftermarket support dedicated to getting their stories to retail, rather, the maintenance required to stay public as a small MicroCap, emerging growth company is not equitable anymore. AND YET! (wait for it)… the SEC and regulators have put these listing requirements in place in order to protect investors!
Aye, there’s the rub.
Is there a middle ground?
In our most recent video interview with David Weild, he discussed his thoughts on creating a venture exchange for small, emerging growth companies; a new construct that would, as he explains, “eliminate a lot of the basic requirements that have caused the collapse in support for MicroCap and NanoCap issuers. We think that if we can basically start with a clean piece of paper and create new stock exchanges that are optimized around the needs for small-cap companies, we can get America back into business.”
A huge statement and undertaking – but, is that what it takes to fix the issues that have been affecting this market? Ideally, the logic is sound: create a favorable infrastructure to support both MicroCap and NanoCap issuers, as well as, investors feeling secure that there is protective measures in place so their dollars are being put into actionable ideas, thus generating more capital for issuers to create more jobs, and make a better America for all. In theory, easy, right? Perhaps…but, let’s ask Mr. Weild himself to understand this concept more.
1. Why do you hear so often about liquidity problems in small- and microcap stocks? The US went to a one-size-fits-all market structure that works only for large cap stocks that are naturally liquid but is a disaster for small cap stocks that trade in a lumpy fashion – big buyer, no seller or big seller, no buyer. Those less liquid stocks need market makers and those market makers must be able to make money. Back in the ‘70s, ‘80s and ‘90s, the US IPO markets were the envy of the rest of the World. When the United States went to electronic stock markets (1998) and electronic brokerage and later penny trading increments (2001), it caused the collapse of the entire “ecosystem” of smaller broker dealers that investors depended on for small cap research, sales and market making support. Lots of bad things happened:
- The numbers of small IPO book runners went from 162 in 1994 to only 32 in 2014
- Small- and Microcap research was cut
- Capital was taken off of trading desks (market makers could no longer earn a return)
- The number of publicly listed companies in the US dropped from over 9000 to less than 5000.
- The number of start-ups in this country went from nearly 15% of all companies to only 8%.
- Labor participation rates dropped (except for people over 65 who are working more because they can’t afford to retire)
- Unemployment increased. (We think more than 10 million jobs were lost since 2000)
- Poor people, who don’t have money in markets and derive no benefit from public markets probably suffered the worst.
2. What are the benefits to issuers of Venture Exchanges? Venture Exchanges would provide the essential economic incentives for Wall Street to invest in and increase aftermarket support to issuers. People don’t understand but the small- and micro-cap equities business loses money for most firms – it’s been made overly “efficient” in the small- and microcap markets. When a bad investment banking market occurs, investment banks that are serving the small- and microcap markets go out of business. This is what happened to Thomas Weisel Partners, Keefe Bruyette and Woods and numerous other investment banks. Venture Exchanges would bring back the critically needed economic model for Wall Street firms to create capacity (infrastructure) in investment banking, equity research and market making to support corporate issuers in the public markets.
3. What are the benefits to investors and consumers of venture exchange? More deals creates more investment opportunities for investors. More capital to support market making will bring back liquidity and that in turn will help attract institutional money into these markets. More institutional money means better prices which in turn drives returns. The only downside is that investors will have higher transaction costs which of course favors long-term investors over short-term traders. However, as I’ve testified in Congress, poor people don’t have money in the market so they derive no benefit from low cost trading. They need jobs. And, consumers benefit broadly from the increased competition (lower price of goods) and innovation (choice) that comes from many smaller companies accessing public markets. It frustrates me to no end when the Consumer Federation of America’s Barbara Roper comes out against higher tick sizes or incentives to support small- and micro-cap stocks because she really doesn’t understand that she is hurting consumers broadly. We helped to bring back the biotech market through the JOBS Act’s “Testing the Waters” provisions. These companies need support. At Weild & Co. we are currently working to help medical devices, biopharmaceutical and drug delivery companies come to market. You tell me what’s more important? Saving pennies in commissions or finding cures to cancer, Alzheimer’s, diabetes, global warming, and creating jobs and tax revenues to lift kids out of poverty?
4. What is the relationship of Venture Exchanges to the almost non-existent IPO market? If the authorizing legislation is crafted properly, Venture Exchanges might single handedly bring back the “non-existent IPO market.” It could be the most important legislation to come out of this or any other Congress. However, it would take time to take hold. Venture Exchanges would need to be developed, approved by the SEC and launched. They would need to provide adequate incentives to bring back the capacity of smaller investment banks that went out of business due to the collapse in economic incentives. If we do build back the ecosystem, we could be back at 950 IPOs a year – which is what we think a country the size of the US should be doing on a GDP adjusted basis versus the paltry 150 IPOs a year since 2000.
5. How would you describe the aftermarket trading of stocks listed on a Venture Exchange? The recent draft of the “Main Street Growth Act” that Chairman Scott Garrett (R-NJ), Chairman of the House Subcommittee on Capital Markets, has circulated would amend the Stock Exchange Act of 1934 to create “Venture Exchanges” which would be exempted from the series of regulatory changes that improved large cap trading but harmed the small- and microcap markets and ecosystem. As a result, we could see an essentially blank canvas that creates a wave of innovation and a variety of new “Venture Exchange” structures that all would be designed with the corporate issuer in mind.
6. What are the listing requirements as compared to OTC Markets or NASDAQ for example? The short answer is that we won’t know until Venture Exchanges are established and the Exchanges file their listing requirements with the Securities & Exchange Commission (SEC) and those listing requirements are approved. As currently drafted, the legislation would exempt companies from Blue Sky filings. I suspect that if that were to be the case then the low-end listing requirements would probably adopt Tier II of Regulation A+ from the JOBS Act.
7. What is the relationship of crowd funding to venture exchanges? Crowdfunding speaks to the manner in which capital raises are conducted for companies. Venture Exchanges speaks to the aftermarket support model. I believe that when the aftermarket works to support small- and microcap companies, financing “windows” stay open longer and more companies raise capital. So, everything else being equal, Venture Exchanges will help drive securities Crowdfunding.
8. How do the regulators look upon Venture Exchanges? SEC Chair Mary Jo White has openly questioned America’s “One-size-fits-all stock markets.” She gets it. All four of the other SEC Commissioners seem to understand that capital formation in this country needs to be improved. All four seem to be embracing the idea of Venture Exchanges. However, they are clearly concerned about investor protections. Given that there has been interest in the US Senate and the US House of Representatives, and at the SEC, I suspect that something will get done. The real question is “What?” and “When?” My bet is that we won’t see major legislation until after the Presidential election so this is not imminent.
9. Will there be as many Venture Exchanges as there are crowd funding platforms? I have been bowled over by the number of Crowdfunding platforms that have sprouted and the way the Crowdfunding community seems to have adopted Reg. A+ as the new way to Crowdfunding of securities since that was never the intent – the intent was to create a less costly way for a company to IPO. I’ve been humbled by the number of people that literally have come up to me at conferences and thanked me for their job. I suspect however, that the process for approval of a Venture Exchange at the SEC may be more stringent than a Crowdfunding platform. If that turns out to be correct, higher costs and regulatory review will create a barrier to entry. As a result, some of the better Venture Exchanges are likely to be launched by established and well-capitalized Wall Street firms, assuming they are permitted.
10. What are your concerns regarding Venture Exchanges? This is potentially the single most important piece of pro-growth legislation that can be passed by this or any Congress. We have to get it right. The future of innovation, U.S. economic leadership and job growth depends on it.
11. We hear Weild & Co., which you founded last year, is starting to get some buzz with corporate issuers and other investment banks. Tell us what’s going on. We are the first company-aligned equity capital markets business on Wall Street. We work with corporate issuers and other investment banks improve results for corporate clients in the public equities markets. We do this by developing technology and proprietary data-driven approaches combined with sales professionals to reach larger numbers of better investors. We are now engaged on, or have completed, private placements of pre-IPO companies, IPOs, follow-on offerings, aftermarket support programs for public companies, M&A execution and fairness opinions.
Editor's Note: David Weild is the “Father” of the JOBS Act – the Act that created everything from the new category of “Emerging Growth Issuer” to equity crowdfunding through Regulation A+ and “general solicitation.” A former vice chairman of NASDAQ and head of Equity Capital Markets at a major Wall Street firm, Weild founded Weild & Co. to bring capital raising services and aftermarket support to public companies that is currently lacking but that issuers desperately need. Weild and his company are recognized as the leading advocates for corporations, capital formation, innovation and job growth. He has spoken at the G-20, the OECD and is a regular before Congress and the SEC. What is less well known is that David is also the “Father” of the upcoming SEC pilot to increase tick sizes (the smallest increment that stocks can be quoted in) and the recent move to create a new type of stock exchange focused on the needs of small- and micro-cap issuers.
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