NVCA Recommends Changes to Proposed Tick Size Pilot Program
WASHINGTON, DC – The National Venture Capital Association (NVCA) today filed a comment letter with the Securities and Exchange Commission (SEC) with recommendations to improve a proposed pilot program that allows for the trading of small-cap stocks at wider tick-sizes.
“NVCA firmly believes that greater liquidity in the small-cap market will benefit investors and issuers alike. A more robust secondary trading market will also enhance the entrepreneurial ecosystem upon which much of the country’s future growth depends. We therefore support the Commission’s decision to order the development of this Pilot program,” wrote Bobby Franklin, President and CEO of NVCA, in a comment letter detailing NVCA’s recommendations to improve the pilot program.
“While we believe that wider tick-sizes for small-cap companies will result in greater liquidity, we recognize that this is a proposition that should be tested in the marketplace. We applaud the decision to create a Pilot rule change to perform this test,” added Franklin. “However, we are seriously concerned that critical elements of the proposed Pilot could fail to produce the data necessary to thoroughly and accurately evaluate this worthy proposition. While well-intentioned, the Commission could unfortunately undermine its own objective simply by incorrectly structuring the Pilot.”
To ensure the success of the pilot program, NVCA recommends the following changes:
Longer Duration: In order for the program to be a fair opportunity to test the new market structure, NVCA believes the duration should be extended from one year to three years or more. NVCA believes the proposed one-year duration will not be sufficient to ensure that those we hope will add liquidity to the small-cap market will do so.
Modify Size of Test Group: From the perspective of the venture industry, the liquidity crisis is most pronounced for companies with a market capitalization of under $1 billion. Therefore, NVCA recommends using a filter based on daily dollar volume in place of the proposed share-based filter.
Eliminate Test Group Three: NVCA believes Test Group Three adds an unnecessary level of complexity to the program and should be eliminated. Specifically, NVCA believes the “trade-at” rule is unnecessary to the stated objective of the pilot program and the complexities of the rule could be detrimental to the overall program.
Measuring Liquidity: Since the problem the pilot program hopes to address is a lack of liquidity, it’s crucial that the metrics for measuring liquidity are sound. Therefore, in order to measure success, NVCA believes that a measurable definition of liquidity should be agreed upon at the outset and that the SEC should measure and track this data through the duration of the pilot program.
Click here to view NVCA’s full comment letter.