David Weild and Ed Kim originally exposed and reported extensively on the long-term decline in U.S. equity capital market share of public listings relative to other emerging and developed global markets. Sadly, this graphic update confirms that the trend has gotten worse. The implications for American innovation are negative. New capital formation and new public equity listings are critical for economic growth. New public equity listings provide strong components of the lifeblood that nourishes economic growth at multiple levels. Clearly, the root causes behind this trend have not been addressed in the financial and regulatory reforms implemented since A Wake Up Call for America was first published in 2009.
The 2009 Grant Thornton report proved without a doubt that the U.S. capital markets for listed equities have been in systemic decline since 1997. This condition is clearly not the result of the technology bubble or Sarbanes Oxley. Most importantly, the absence of U.S. IPOs negatively impacts American entrepreneurs most of all, regardless of whether they have venture capital or private equity backing.
In 2012, of the 128 IPO’s completed in the US, the median deal size of $124 million marked a drop of 2% from 2011. Excluding Facebook, total proceeds from US IPO’s declined by 27% in 2012 from 2011. According to the Renaissance Capital report ,all the ten top performing companies’ stock prices and the worst performing companies’ stock prices were from IPO deal sizes exceed $50 million. This data confirms the continuing absence of IPO’s whose proceeds are below $50 million—and this fact remains a major problem for promising US startups. Our country will continue to suffer the consequences of this trend as long as positive economics for supporting small cap companies in the market are absent.
What can we do about it? One possible solution to this trend would be to establish an issuer and investor opt-in capital market that would make use of full SEC oversight and disclosure, and could be run as a separate segment of NYSE or NASDAQ, or as a new market entrant. It would offer:
- Opt-in/Freedom of Choice – Issuers would have the freedom to choose whether to list in the alternative marketplace or in the traditional marketplace.
- Public – Unlike the 144A market, this market would be open to all investors.
- Regulated – The market would be subject to the same SEC corporate disclosure, oversight and enforcement as existing markets.
- Quote driven – The market would be a telephone market supported by market makers or specialists, much like the markets of a decade ago.
- Minimum quote increments (spreads) at 10 cents and 20 cents and minimum commissions – 10-cent increments for stocks under $5.00 per share, and 20 cents for stocks $5.00 per share and greater, as opposed to today’s penny spread market. These measures would bring sales support back to stocks and provide economics to support equity research independent of investment banking.
- Broker intermediated – Investors could not execute direct electronic trades in this market; buying stock would require a call or electronic indication to a brokerage firm, thereby discouraging day-traders from this market.
Research requirement – Firms making markets in these securities would be required to provide equity research coverage that meets minimum standards.
This idea has been presented to our legislators before but has not gotten any traction. In my view, these new statistics reinforce the need to take another look at constructive, market-based solutions to a severe problem that continues to stifle US economic growth.