I’ve been speaking publicly for over one year about the disastrous impact of the capital markets crisis in accelerating the demise of small emerging company IPO’s. To be clear, this process began over eleven years ago and, in my view, it is the single most important issue for the venture capital community because it jeopardizes an entire generation of innovative American companies. In addition to revitalizing America’s slipping global competitiveness, restoring emerging company IPOs in the U.S. will efficiently create new jobs and drive a new, sustainable economic growth cycle in our country.
Grant Thornton LLP’s Capital Markets Group today announced the release of Market Structure is Causing the IPO Crisis, a white paper examining the demise of initial public offerings in the United States, and offering remedies to resurrect the IPO market. The paper is a follow up to Grant Thornton’s original study, Why are IPOs in the ICU?, which was published in November 2008.
The new white paper provides fresh market data and incorporates additional insight gleaned from discussions with a wide range of key market participants, including former senior staffers at the SEC and senior executives at “bulge bracket” and “major bracket” investment banks.
Co-authored by David Weild, Senior Advisor at Grant Thornton, founder of Capital Markets Advisory Partners and former NASDAQ vice-chairman, and Grant Thornton Senior Advisor Edward Kim, the updated study continues to focus on how technological, regulatory and legislative changes have combined to chisel away at the U.S. IPO market. Although conventional wisdom holds that the U.S. IPO market has been going through a cyclical downturn exacerbated by the recent credit crisis, the paper points out that in reality, the market for underwritten IPOs, given its current structure, is closed to 80% of the companies that need it.
“Despite the recent uptick in IPO activity, over the last several years, initial public offerings in U.S. have nearly disappeared,” noted Mr. Weild. “Our findings since publication of the original white paper have served to reinforce our thesis that the loss of the IPO market in the United States is due largely to changes in market structure. By killing the IPO goose that laid the golden egg of U.S. economic growth, the combination of technology, legislation and regulation undermined investment in small cap stocks, drove speculation and killed the best IPO market on earth.”
The white paper proposes a solution to this crisis – 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.
To view the full paper including updates, please visit: www.gt.com/ipo.