Increasing numbers of professionals in a position to foment meaningful change in the capital markets are recognizing that structural issues underlie the IPO drought for emerging companies with market capitalizations below $1 billion. This must become a widely held point of view before any meaningful structural reform can take place, setting aside the legislative delays we can continue to expect from the partisan divisions that have rendered our elected leaders ineffective.
I’ve made this structural argument for over three years on this blog and in public speeches. Again, I urge readers to make their voices heard on this topic. On November 24, 2008 I wrote A Case Study in the Unintended Consequences of Financial Regulation: The Death of the U.S. Small Cap IPO? and invited anyone with constructive, practical ideas on how to revitalize IPO’s in the United States to contact me so that I could pass along their ideas to my colleagues at the National Venture Capital Association. In this post, I made a strong argument that structural market issues were the root cause of the death of the small capitalization IPO:
The lack of IPO’s in the U.S. has broad, negative implications for continued risk taking by U.S. venture capitalists. If we have no public market liquidity for emerging growth companies, there will be no next generation of American technology giants. The demise of the technology IPO has also contributed to the structural breakdown in the broader cycle of research and development that underlies the American innovation crisis…
This post followed my exposition of the argument that America would face an overall crisis in innovation, drawing on work by Judy Estrin and others, in September 2008: The Innovation Crisis Is Coming- Let’s Do Something About it Now!
Sadly, the veracity of these arguments is being proven over and over again, as the venture capital industry continues to shrink and the fallacy of an American jobless recovery becomes apparent. Pointing to the success of several handfuls of social media companies as an index for the general health of innovation in the U.S. in 2011 is not statistically meaningful and irrelevant to the thousands of startups that are finding it impossible to reach the much greater critical mass necessary to access the public equity capital markets today. To be clear, publicly traded household names that would not be able to go public today based on current IPO requirements include Dell, Intel, EMC, Yahoo!, Intuit, EA Sports, and many others.
In an article published on October 6, 2011 in Traders Magazine.Com, conference remarks by several leading international stock exchange professionals show that they are coming around to understanding the downside to small companies of a trading market infrastructure that treats unknown emerging public companies the same way as multi-billion dollar liquid securities:
“Though trading costs have gone down, that isn’t necessarily a good thing, according to Steve Wunsch, head of corporate initiatives at the ISE Stock Exchange. He said low trading costs have made it difficult for anyone to make money trading smaller names, thus drying up markets for smaller companies.”
Joseph Hall, a partner with the law firm of Davis Polk & Wardell, said the government could have caused part of the problem by repealing the Glass-Steagall Act’s separation of investment banks and commercial banks. That allowed a lot of small brokers to be bought up by big banks, reducing niche trading, he said.
Grant Thornton’s [David] Weild placed more of the blame on Reg NMS, which he said homogenized the markets to the detriment of new issuers. He said a one-size-fits-all market structure does not support smaller, newer companies.
The good news, Weild said, is that Washington seems to be paying attention. …
In my view, the bad news is that it’s taken three years since the global financial crisis erupted for us to get an increasing number of influential people to pay attention. Meanwhile, millions of jobs have been lost, and innovation in America continues to suffer.