January 2020 • Ronald Woessner Blog

January 26, 2020January 26, 2020

Going Public is an “On Ramp to Nowhere” for Smaller Cap Issuers

There has been much commentary about expanding the public company “on ramp” by making it easier for companies to go public. JOBS Act 2.0 made meaningful progress in that regard. Unfortunately, the U.S. public markets are an “on-ramp to nowhere” for many smaller-cap issuers because the public markets are inhospitable to smaller cap companies. Manifestations of this inhospitability are illuminated in a LinkedIn article appearing here, articles published by equities.com appearing here, and in my Response to Commission Statement on Market Structure Innovation for Thinly Traded Securities [Release No. 34-87327; File No. S7-18-19] published just TODAY by the SEC.

Quoting from slides 2 and 3 of the SEC filing:

As long as the view from the IPO “on-ramp” suggests that the prospects of taking on all the additional costs and risks of going public, but struggling to capitalize the benefits, many start-up founders, managers and investors will continue to think twice about choosing to finance their growth via the public market.
There are thousands of smaller-cap public companies, including OTC Markets issuers, that have the potential to create millions of jobs and grow GDP.
Many of these companies are “dying on the vine” because of their inability to access non-toxic capital and other inhospitable attributes of the US public markets.
Thousands of these issuers with the potential to grow, thrive and become vibrant NYSE or NASDAQ issuers and veritable job and GDP creation machines, NEVER will achieve that. Many will stagnate; others will go out of business … with the foreseeable result that the number of US publicly listed issuers will continue to decline, and one day there will be insufficient large cap issuers for Fidelity, Vanguard, large pension funds, etc. to invest in.

Read the entire filing at https://www.sec.gov/comments/s7-18-19/s71819-6671698-204008.pdf.

Thank you for your interest as we continue the struggle to keep the US public markets the world’s pre-eminent capital market and prevent the Chinese from overtaking America.

January 26, 2020January 26, 2020

Smaller Cap Issuer Valuations Crushed by Dodd-Frank?

The chart above, excerpted from an article by noted financial analyst Michael Markowski, who predicted the demise of Lehman, Bear Stearns and Merrill Lynch, appears to illustrate that the Dodd-Frank legislation crushed the values of smaller cap companies. Mr. Markowski’s article appears at this link: https://www.equities.com/news/dodd-frank-boon-for-large-caps-bust-for-micro-caps

Is this causation, or merely correlation? We don’t know for sure.

What we do know is that smaller cap public company valuations have diverged markedly from larger cap public company valuations, regardless of the proximate cause. As an investment asset class, they appear to have performed poorly.

Further, to add to the woes of the smaller cap public companies, we also know that the US public markets are generally* inhospitable to smaller cap companies. This inhospitability manifests itself as follows:

(1) Smaller-cap stocks are illiquid

(2) Institutional investors avoid investing in illiquid smaller cap stocks

(3) Smaller-cap companies have little-to-no investment analyst coverage

(4) Smaller-cap companies are starving for capital

(5) Much of the available capital to smaller-cap companies is “toxic”

(5) Gaps in SEC “short” selling regulations enable short sellers unfairly to damage smaller-cap company valuations and the companies themselves

We will review each of these elements of inhospitabililty in subsequent articles.

* Of course, there will be exceptions to the above general principles, particularly if the company is in the biotech or cannabis space.

January 17, 2020January 17, 2020

Entrepreneurship in the US is an Endangered Species – reprinted by Ronald Woessner

Image: Amur leopard, a critically endangered species. Source: World Wildlife Fund

According to a recent Forbes article, America ranks as the best country for female entrepreneurship. That’s “good.” On the other hand, the “bad” is that companies founded by women entrepreneurs are less likely to be funded by a venture capital firm than the Earth being struck by an asteroid, as I discussed previously in this space.

That’s “not so bad,” though. Women entrepreneurs are not missing out on much by not being funded by venture capital firms => since venture capital firms fund only approximately five of every 10,000 startups in America, according to Entrepreneur.com.

The “worst,” news, however, is that women entrepreneurs will join their male counterparts in struggling to raise capital to keep their businesses alive because of the lack of investment capital for start-up businesses in America as a whole.

This lack of investment capital for US start-up businesses is an endemic problem. Like an invisible chain, it extends across the length and breadth of the US and restrains an entire ecosystem, beginning with startups in a garage, and extending to OTC Markets traded companies, and further extending to smaller-cap publicly listed companies.

Without sufficient capital, these businesses fail.

Predictably, many would-be entrepreneurs decide to keep their day jobs rather than taking the entrepreneurial leap when they see the businesses of their friends, neighbors, or relatives go “out of business” and the often-consequent loss of life savings and the family home.

With this background in mind, you might be thinking that fewer and fewer Americans want to become entrepreneurs today than in previous years. You are correct.

The data demonstrates that entrepreneurship in America is dying. In February of this year, Mr. David Weild IV, “Father of JOBS Act 1.0,” former Vice Chairman of NASDAQ and New York investment banker, gave a presentation at The Yale Club of NYC. The JOBS Act, signed into law by President Obama in 2012, was a great start for the movement to level the playing field for emerging growth companies, but even Mr. Weild will tell you that more needs to be done.

The presentation included a “heat” map, derived from Census Bureau statistics of US business formations by state per capita. The heat map shows business startups by state, per capita, in 2006 versus 2017. In 2006, the map shows much of the US as dark red, connoting high numbers of startups per capita. Disturbingly, in 2017, the map shows much of the US as pale pink, connoting a paucity of startups.

Business Formations within 4 Quarters by State – Per 1,000 People

And, while entrepreneurship in America is dying, so are the US public markets according to some. Others say the public markets are inhospitable to smaller cap companies or that the public markets are “broken.” Regardless of the choice of words, the US public capital markets are no longer the envy of the world, as they once were. To wit:

(1) 3,500 (40%) of the approximate 8,700 NASDAQ/NYSE trading symbols (mainly smaller-cap issuers) have average daily trading volumes under 50,000 shares per day, and approximately 50% had volumes under 100,000 per day, according to the SEC.

(2) There are approximately 50% fewer public companies today than 20 years ago.

(3) The number of book runners for smaller IPOs (<$100 million in proceeds) has decreased from 162 in 1994 to 31 in 2014.

Americans are struggling. The US public markets are dying. Entrepreneurship is dying. It’s time for Congress or the SEC, or both, to adopt pro-capital formation policies before matters continue to get worse. If not remediated, the US will forfeit its position as the financial capital of the world. And, that would be really, really bad.