This past Monday, NVCA participated in the release of a new report aimed at improving access to public capital for startups and emerging growth companies. Entitled “From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies,” the report follows up on the 2011 efforts of the IPO Task Force, whose “Rebuilding the IPO On-Ramp” report helped lead to the passage of the JOBS Act of 2012., NVCA Board Director Scott Kupor (Andreessen Horowitz) served as co-Chair of the new task force, while I provided policy guidance.
The report begins by detailing how the JOBS Act has re-energized interest in the public markets on the part of startups. According to the investment database Dealogic, more than 200 companies have registered with the SEC as “emerging growth companies” since the law’s enactment. However, the number of IPOs remains below historical norms. One possible cause for this disparity between interest in public offerings and actually following through may be a lack of trading liquidity and aftermarket support (i.e. research coverage and market-maker support) for small companies after their IPOs. The result of recent changes in the mechanics and economics behind stock trading, these challenges can make it difficult for small-cap companies to raise additional growth capital after their IPOs. In short, many small-caps take on the costs and risks of becoming public companies without enjoying the benefits. This dynamic may still give pause to portfolio companies as they evaluate IPOs against other exit options.
The “Freeway” report’s recommendations address these challenges for emerging growth companies by proposing new rules for trading small-cap stocks. Specifically, these rules would increase the minimum quote increment for small caps from one cent to five cents – thus increasing the potential economic incentive for trading small cap stocks. In addition, trading of these stocks would be limited to the bid price, the ask price, or the mid-point between the two, which the task force believes will curb some of the trading strategies that undermine liquidity in the small cap market.
So far, the report has generated a healthy amount of interest both in Congress and in the administration. Only a few weeks remain in the legislative calendar this year, but we will continue to educate members of Congress and the Securities and Exchange Commission (SEC) on these issues, with the goal of seeing more concrete steps early in 2014.