The probability of planet Earth having a catastrophic collision with an asteroid is higher than the probability that a startup founded by all women will be funded by a US venture capital firm.
Startling, isn’t it? Read on.
According to the entrepreneur.com article here, as seen in the chart below, venture capital firms fund about 0.05% (1/20 of 1%) of US startups.
1 Excludes ICOs. 2 According to the article here of StartEngine, one of the largest equity crowdfunding portals, as of February 2019, since inception only $176 Million has been raised via crowdfunding. In comparison, venture capital firms funded $130.9 billion across 8,949 US companies in 2018!
As
recently widely reported, for example in the article here, of these
1/20 of 1% of startups funded by venture capital firms, only 2.5% have all women
founders.
So
according to the math:
0.0005 * 0.025 = 0.000125 of startups in
America will have all women founders and will be funded by venture capital
firms, or 1.25 of every 10,000 startups.
In comparison, the odds of the earth having
a catastrophic collision with an asteroid in the next 100 years may be as high
as 1 in 5,000 according to the
article here.
As revealed with a little more math,
1/5000
= 0.0002 odds of the earth having a catastrophic collision with an asteroid in
the next 100 years
1.25/10,000
= 0.000125 odds of an all-women start-up being funded by a venture capital firm
0.0002/0.000125
= 1.6
In sum, the earth is 1.6 times more likely to have a
catastrophic collision with an asteroid in the next 100 years than a start-up with
all women founders is to obtain funding from a venture capital firm!
As amusing as some may find the above comparison, it’s really quite a serious problem for America. Female human capital is simply not being given the opportunity to succeed. American entrepreneurship is stymied, tens of thousands of US jobs are lost, upward mobility is choked, and the US economy and future economic growth are being stunted — of of which, if left unchecked, will one day result in the US losing the current battle with China for worldwide technology dominance.
And, if you are a woman of color – the odds of securing venture funding approach zero. According to Ms. Kapin, only 0.0006% of venture funding has gone to women of color since 2007. Applying this metric to the $130.9 billion in 2018 venture funding noted in the chart above, approximately $785,000 would have gone to firms founded by women of color. More information on the topic of funding to minority founders appears here, “Untapped Opportunity: Minority Founders Still Being Overlooked.
As noted in an earlier article of mine, US public policy is killing small business and entrepreneurship in America, keeping the poor “poor” and thwarting the American Dream of “Main Street” upward mobility: the US public capital markets, once the envy of the world, are in-hospitable to smaller-cap companies; US entrepreneurship is at historical lows[1]; on a GDP basis, the US surpassed only two of the world’s top 26 IPO markets — Mexico and Brazil — as to the number of smaller-cap company IPOs[2]; the Chinese are lapping the US in the number of total IPOs[3]; and millions of high-quality U.S. jobs have been forfeited.
To remedy this, a “big-tent,” bi-partisan, multi-racial, male/female coalition advocacy effort is being organized in Washington, DC. The coalition, named “JUMMP” (“Jobs, Upward Mobility, and Making Markets Perform”), is being spearheaded by David Weild, former Vice-Chairman of Nasdaq, New York-based investment banker, and “Father of JOBS Act 1.0.” Pro-entrepreneur and pro-upward mobility Americans, including me and others, from both sides of the political aisle in Washington, DC, and throughout the US, are helping Mr. Weild.
The JUMMP Coalition’s objectives are
to:
restore America’s capital markets to their former health,
create millions of US jobs,
help US entrepreneurs regardless of color and gender succeed,
reverse the increasing income inequality trend,
reinvigorate the American Dream of upward mobility from one generation to the next,
bring millions of Americans, especially minorities and others who have not realized the financial benefits of the US economic expansion, to the metaphorical “mountain top,” and
assure the US maintains its worldwide technological dominance
In the meantime,
until the JUMMP Coalition achieves these objectives, if you are a woman founder of a startup and your
business plan requires venture capital funding – it would probably be best if
you have a backup plan.
[This is a reprint of an article published by equities.com here.]
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[1] Unpublished White Paper of David Weild, former Vice-Chairman of Nasdaq, New York-based investment banker, and “Father of JOBS Act 1.0.” A “heat map” included in Mr. Weild’s White Paper shows that the number of start-ups in America in 2017 versus 2006 in the vast expanse of Middle America between the East and West coasts has decreased by approximately 50%.
[2]
“Making Stock Markets Work to Support
Economic Growth,” Weild, Kim & Newport for the OECD, July 11, 2013, at
p. 54. For the period from 2008-2012 the U.S. had a disastrous “Efficiency
Ratio” of GDP-weighted output of small IPOs — at only 0.4 IPOs per $100
billion of GDP (ahead of only Mexico and Brazil).
[3] According to Mr. Weild’s research, the number of public companies in China has increased by 381% since 1997, while the number of public companies in the US has decreased by 39%.
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Mr. Woessner mentors, advises, and helps companies in the start-up and smaller-cap company ecosphere raise capital through Regulation Crowdfunding (CF) and other means, bringing to bear his 25+ years of experience in the smaller-cap, public company ecosphere as CEO and general counsel. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. See herefor more information on Mr. Woessner’s background.
Ronald Woessner This is a reprint of an article of mine originally published by equities.com at the link here.
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Public Policy is Killing Stock Markets for Smaller-Cap Companies
US Public policy has caused the well-publicized and alarming decrease in the number of US publicly-listed companies and is poisoning the public markets for smaller-cap companies.[1]
The number of US publicly-listed companies
decreased over the last two decades by about 44%, from 8,823 in 1997 to 4,916
in 2012, according to the World Federation of Exchanges. A 2018 academic study from the Harvard
Kennedy School reveals similar numbers.[2]
Other countries are lapping the
US in the number of their public company listings versus our public company
listings. During the comparable period in other developed countries, public
listings increased by about 48%.[3]
The US “should have”
approximately 10,000 public companies today, resulting in an estimated
“listing gap” of approximately 6,000 companies.[4]
This
decrease should be shocking and frightening to all Americans, regardless of
party affiliation, particularly when one considers that real GDP has grown by
over 60% in that time frame. Why, when our economy is growing strongly, has our
public listing machine come to a grinding halt?
This
decrease has cost America tens of millions of jobs,[5]
reduced to a mere trickle the queue of future “Fortune 500” larger-cap
companies for Fidelity, CalPERS and hundreds of pension plans to invest in,[6]
and puts the US on the vector of falling behind China in China’s quest to
dominate the US technologically.[7]
Here’s the chain of causation that’s created the US Listing Gap:
Step 1: The introduction of electronic trading
execution, order handling rules, and smaller tick sizes collapsed buy/sell
trading spreads to $.01 from $.25 per share and collapsed retail sales
commissions to $5.00 per trade from $250 per trade.[8]
Step 2: These smaller bankable
spreads and reduced retail sales commissions DRASTICALLY reduced the
profitability (i.e., ability to make
money) of smaller and mid-size broker dealers. This drove 74% of IPO
bookrunners out of business[9] and drove 29% of
broker-dealers out of business.[10] Those remaining eliminated the investment
banking, research, retail sales, and capital committed to market making (i.e., creating stock trading liquidity) they
previously provided for smaller-cap companies.[11]
Step 3: Lack of this
“after-market” support from smaller and mid-size broker dealers has
left thousands of smaller-cap companies as public-company “orphans,”
with no broker-dealer or investment-banking sponsorship, and poisoned the public
markets for smaller-cap companies.[12]
Step 4: This
in-hospitability deters smaller-cap companies from conducting IPOs and going
public. The big investment banks discourage these smaller deals with smaller stock
trading “floats,” as they are difficult to market to their most
actively trading institutional clients. They are also difficult transactions
purely from an ROI and opportunity cost perspective of allocated resources.
Step 5: This disappearance of the smaller-cap
company IPO (< $50M) is predominantly responsible for the US Listing Gap
according to academic research and as stated by former SEC Commissioner Michael Piwowar during his
opening remarks at an SEC – NYU conference on IPOs in May 2017: “The
substantial drop in the number of IPOs in the United States is primarily driven
by the disappearance of small IPOs.”
Former Commissioner Piwowar is correct.
The number of IPOs raising less than $100 million collapsed starting in 2000.
The number of these small IPOs averaged 401 annually in the 1990s, but then
dropped to only 105 annually in the 18 years since. In the 1990s, small IPOs
represented 27% of all capital raised in the public markets, whereas in the
period from 2000 to present they have represented only 7% of all capital
raised.[13] Moreover, according
to an OECD study, during 2008 – 2012 on a GDP weighted basis the US was
third from the bottom for small IPOs among 26 countries studied — ahead
of only Mexico and Brazil.[14]
The electronic execution, order handling
rules and $.01 tick size trading rules created the salutary benefit of reducing
stock trading transaction costs. Nevertheless, they also had the unintended
negative consequence of killing the small-cap IPO and creating the currently
poisoned US public markets for smaller-cap companies. As eloquently stated by David
Weild,
former NASDAQ Vice-Chairman, Wall Street investment banker, father of JOBS Act 1.0,
and tireless advocate for the health of the US
capital markets:
“Why
have smaller-cap company IPOs disappeared? Because the profitability of the
investment banking-focused broker-dealers —
which previously sponsored and fostered a habitable environment for
smaller-cap companies through underwriting, distributing and supporting them in
the after-market via sales, research, and market-making (capital commitment) —
has been destroyed by electronic-order execution, small-tick-size markets,
that make it easy for predatory short-sellers to collapse trading spreads
(especially in advance of offerings) and spread lies to drive down stock prices
that cannot be countered because the investment banks that remain can no longer
afford to provide research and sales coverage to counteract the lies.”[15]
Through the “butterfly effect,”[16] the electronic execution,
order handling rules and $.01 tick size trading rules had the unintended
consequences[17]
of:
killing the
smaller-company IPO market,
causing the loss
of tens of millions of US jobs,
forcing businesses
to close because of lack of capital,
discouraging
entrepreneurship,
hindering upward
mobility for all Americans, especially minorities
destroying the
efficacy of the US capital markets, and
creating an
opportunity for the Chinese to technologically dominate the US.[18]
Who
would have thought that the lack of a few pennies in tick size would have
poisoned the US public capital markets, once the envy of the world?[19]
So,
what is to be done to remedy the current in-hospitability of the public markets
to smaller-cap issuers, which is causing them to avoid the US public market?
Let’s
use our common sense to intuit the policy solution. Since the $.01 bid/ask tick
size is a root cause of the current inhospitably of the public markets to
smaller-cap companies, then one would naturally think that increasing the tick
size to some larger number would remedy the issue.
And,
indeed, academic research demonstrates this to be precisely the case!
The
academic research of Mr. Weild and his colleagues demonstrates that widening
tick sizes for smaller-cap illiquid stocks results in more smaller-cap
companies going public. In
other countries where there are higher tick-sizes-as-a-percent-of-share price (which
in turn leads to higher bid-ask spreads) their smaller-cap IPOs are booming.
There is a nearly 70% correlation between tick-sizes greater than 1% of an
issuer’s trading price and a robust IPO market for companies under $500 million
in market value, according to the research.[20]
Now, a word about the two year 2016 – 2018
SEC tick
pilot study.[21] The study increased the tick size from $.01
to $.05 for the pilot stocks. It has been reported that the study was a
“failure” because it cost investors approximately $350M more to trade
the pilot stocks during the study period and did not produce the hoped-for and
anticipated increase in the trading liquidity of the pilot stocks.[22] Commentators have
incorrectly concluded from these reports that larger tick sizes and larger bid-ask spreads do not increase trading liquidity.
These
commentators are incorrect. The failure of the tick pilot study to produce the
hoped-for and anticipated increases in trading liquidity of the pilot stocks is
100% attributable to the inherently flawed design of the study.[23]
The
study design was inherently flawed in that that
there was a null set (i.e., ZERO) of stocks
in the pilot that could benefit from the tick pilot. The explanation
appears below.
Recall that the academic research says the
tick size must be > 1% of the stock share price. The $.05 tick was not >
1% for those stocks priced > $5.00 per share. The $.05 tick was > 1% for those stocks
priced < $5.00 per share … but broker-dealers cannot recommend them for
purchase because of brokerage firm policies[24] and such stocks cannot be
purchased on margin.
Since the study design
was inherently flawed to benefit ZERO issuers, it’s not surprising that ZERO
issuers benefitted.
In
conclusion, it is clear what needs to be done from a policy perspective to
remedy the poisoned and collapsing US public capital markets: create a special
exchange with special trading rules for smaller-cap issuers that permit higher
bid-ask spreads.[25]
These
higher bid-ask spreads will then create the profitability broker-dealers need
to begin again providing after-market
“sponsorship” and support for smaller-cap companies in the form of:
investment
banking,
investment analyst
research,
providing retail sales persons to solicit customer buy orders, and
committing capital
to make a trading market in the issuer’s stock
These
activities would in turn make the public capital markets more hospitable to
smaller-cap companies, which in turn would motivate more of them to go public,
and would enable those that are already public to thrive.
A
big-tent, bi-partisan advocacy effort is now being organized in Washington, DC,
to present this initiative to Congress and to the SEC. If you want to help:
restore America’s capital markets to their former health,
create millions of US jobs,
help America’s entrepreneurs succeed,
promote upward mobility and bring millions of Americans, especially minorities and others last hired during an economic recovery, to the metaphorical “mountain top,” and
assure the US maintains its worldwide technological dominance
[1] There are approximately 5,500 “publicly-listed” companies listed on the NYSE and NASDAQ. There are another approximately 10,500 “OTC-traded” companies. The term “public markets” as used in this article refers collectively to both publicly-listed and publicly-traded companies.
[2]“Hunting High and Low: The Decline of the Small IPO and What to Do About It,” Lux and Pead, Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School (April 2018), https://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp86 (hereinafter cited as “Lux & Pead”). The World Federation of Exchanges number of publicly-listed companies as of December 2018 is 5,343. There appears to have been a modest uptick resulting from JOBS Act 1.0 and JOBS Act 2.0 and the robust economy.
[3] 9,538 is the estimated “should have” number as of 2012 according to the study. “The U.S. Listing Gap,” Doidge, Karolyi, and Stulz, December 2015, at p. 8.
[4] The author
extrapolates to an estimated 10,000 “should have” number in 2019.
Other commentators peg the “should have” number of public companies
as > 13,000.
[5] It is estimated
that 22M jobs were lost between 1997 and 2010 because of the reduced level of
IPO activity. “A Wake-Up Call for America,” Weild & Kim, November
2009 (hereinafter cited as “Weild & Kim”), at p. 27.
[6] Today’s Fortune
500 companies were smaller-cap companies at one time. It’s necessary to have a public market
ecosystem that enables smaller-cap companies to thrive so that those
smaller-cap companies who have the potential to become a Fortune 500 company –
have a fighting chance to do so. Today’s
public market ecosystem is so inhospitable to smaller-cap companies that many
who have the potential to become a Fortune 500 company will never achieve their
potential.
[8] “Hearing on
Legislation to Further Reduce Impediments to Capital Formation,” Financial
Services Committee, on October 23, 2013, Statement of David Weild, at 15 – 16.
[9] As of 2012, there were only 44 IPO bookrunners still in business, down from 167 in 1994. Id.
[11] The $.01 bid/ask trading spreads
have (a) decimated the ranks of the small-to-mid size broker dealers/investment
banks who formerly provided after-market support for smaller-cap companies, (b)
eliminated virtually 100% of the retail salesmen who previously phoned retail
investors and solicited buy orders for a small-cap issuer’s shares of stock, and
(c) decimated the ranks of the sell-side investment analysts who left the
industry in droves to work for hedge funds and the like.
[13] Lux and Pead at
p. 8. A delta of 296 (401 – 105) * 18 years = 5,328, which predominantly
accounts for the Listing Gap.
[14] “Making Stock
Markets Work to Support Economic Growth,” Weild, Kim & Newport for the
OECD, July 11, 2013 at p. 54.
[15] “Fixing America’s IPO Markets, Why this is Essential for US National Interests, Ideas for JUMMP Act 1.0,” D. Weild, unpublished paper, February 2019.
[16] The butterfly effect is the phenomenon whereby a minute localized change in a complex system can have large effects elsewhere.
[18]Id. There is an additional network effect that magnifies the extent of this damage. Enrico Moretti at Berkeley in his book. “The New Geography of Jobs,” wrote about the “multiplier effect” of how a single high-tech job in an “innovation hub” like Boston, San Francisco, or Raleigh-Durham creates five new jobs in the surrounding service sector. Hence, all those IPOs that didn’t happen didn’t create a successful company that then didn’t hire people that then resulted in the communities not flourishing.
For want of a nail the shoe was lost. For want of a shoe the horse was lost. For want of a horse the rider was lost. For want of a rider the message was lost. For want of a message the battle was lost. For want of a battle the kingdom was lost. And all for the want of a horseshoe nail.
[20] “Making Stock Markets Work to Support Economic Growth,” Weild, Kim & Newport for the OECD, July 11, 2013, at p. 54. For the period from 2008-2012 the U.S. had a disastrous “Efficiency Ratio” of GDP-weighted output of small IPOs — at only 0.4 IPOs per $100 billion of GDP (ahead of only Mexico and Brazil). Why? Because the US has the lowest tick-sizes-as-a-percent-of-share price of any of the 26 countries studied. A number of countries enjoy 50x the GDP-weighted output of the number of small IPOs in the US. Id.
One
may ask: “How do we know this is causation and not merely
correlation?” Answer: because we have seen from our experience here
in the US how the lower bid/ask spreads created the loss of after-market
support for smaller-cap issuers. See note 12 above and the articles cited
therein.
[21] The SEC studied for two years the effects on the trading liquidity
of 1,200 NMS pilot stocks of widening the tick size from a penny ($.01) to a
nickel ($.05).
[22] Trading liquidity
is necessary for a public issuer to attract investment firm capital. As noted
by Weild & Kim and in earlier articles of mine: without trading liquidity a public issuer has
virtually zero chance of attracting non-toxic investment firm capital. See, e.g., https://www.equities.com/news/why-do-investment-analysts-ignore-smaller-cap-companies.
[23] Early proponents of the SEC study criticized the proposed
study design at the time it was being designed.
At the time, Mr. Weild and others stated that the study design
was flawed and not remotely close to the tick size pilot they had advocated
for. The Carney – Duffy legislation,
which would have required the SEC to conduct the pilot according to certain
parameters, called for a 5- year pilot (not 2 years) and a $.10-cent tick size
(not $.05). The legislation never became
law and hence the SEC did not follow these parameters in designing the study.
[24] Brokerage firm policies prohibit
brokers from calling customers to solicit a buy order for stocks priced at
<$5.00 per share.
[25] This is the fundamental requirement. Obviously, there are hundreds of other details as well that would be necessary for such a trading venue to function properly.
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Mr. Woessner mentors, advises, and helps companies in the start-up and smaller-cap company ecosphere raises capital through Regulation Crowdfunding (CF) and other means. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. See here for more information on Mr. Woessner’s background.
SEC Provides Enforcement Driven Guidance On Digital Asset Issuances And Trading
On November 16, 2018, the SEC settled two actions involving cryptocurrency offerings which settlement requires the registration of the digital assets. On the same day, the SEC issued a public statement stating, “[T]hese two matters demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities.”
The two settled actions, CarrierEQ Inc., known as Airfox and Paragon Coin Inc., both involved an unregistered issuance of a cryptocurrency. In its statement the SEC highlighted three other recent settled actions involving digital assets and, in particular, the actions involving Crypto Asset Management, TokenLot and EtherDelta. The three additional cases involved investment vehicles investing in digital assets and the providing of investment advice, and secondary market trading of digital asset securities.
The SEC has developed a consistent mantra declaring both support for technological innovation while emphasizing the requirement to “adhere to [our] well-established and well-functioning federal securities law framework…” However, as Commissioner Hester Peirce has pointed out in her speeches, the current federal securities law may not be the best framework for the regulation of digital asset securities and their secondary trading. Although the overall purpose and structure of the Securities Act of 1933 (“Securities Act”) and its implementing rules, including the idea that the offer and sale of securities must either be registered or issued under an available exemption, and that investors are entitled to disclosure, may be appropriate, the granular requirements under the Act need to be updated to encompass new technology including blockchain and digital assets. Likewise, and maybe even more so, the broker-dealer, ATS and national exchange registration requirements, and the reporting requirement of issuers found in the Securities Exchange Act of 1934 (“Exchange Act”) and its implementing rules, need to be reviewed and updated.
Airfox and Paragon Coin Inc. – Offers and Sales of Digital Asset Securities
The SEC has brought many actions related to the offers and sales of digital assets – some before, and many after, the issuance of its Section 21(a) Report related to the offer and sale of tokens by the DAO. The Section 21(a) Report clearly laid out that a determination of whether a digital asset is a security requires an analysis using the Howey test as set out in the U.S. Supreme Court case SEC v. W. J. Howey Co. In various speeches and public statements following that Report, SEC officials, including Chair Jay Clayton, expressed their views that pretty well all ICOs to date involved the offer and sale of a security and, unfortunately, many had not complied with the federal securities laws. A slew of enforcement proceedings followed and a shift in the ICO craze to a more compliant securities token offering (STO) resulted.
However, to date, STOs have relied on registration exemptions, such as Regulation D, in their offerings rather than registration under the Securities Act. When registering an issuance under the Securities Act, an issuer must comply with the full disclosure obligations under Regulations S-K and S-X. This has proven challenging for both issuers and the SEC when the security being registered is a digital asset. Among the numerous issues to figure out have been providing a wallet to recipients, the custody of digital securities, the maintenance of a registrar and transfer agent duties, the lack of a licensed operational secondary market, cybersecurity issues, programming the digital security for the myriad of rights it may have (analogous to common stock, or completely different such that it could morph into a utility), selling and distribution methods, and the numerous issues with accepting other digital assets or cryptocurrencies as payment for the registered securities token.
If a placement agent or underwriter is involved, that placement agent or underwriter must not only resolve all of these matters, but additional issues such as escrow provisions, KYC and AML matters and even their own compensation, which typically involves not only cash, but payment in the security being sold either directly or through convertible instruments such as warrants.
These issues have not only added cost to a registration process, but time as well. The SEC has unapologetically informed registrants that the process would not follow the usual comment review timeline. Yet time has been beneficial to the entire industry as the SEC has continued to make efforts to educate its staff and figure out how to help companies successfully register digital securities. At the American Bar Association’s fall meeting in November, SEC Division of Corporation Finance (“Corp Fin”) Director, William Hinman, remarked that about half a dozen ICO S-1’s and a dozen ICO Regulation A+ filings are currently being reviewed by Corp Fin on a confidential basis.
Unlike a registration for the issuance and sale of specified securities, a registration statement under the Exchange Act registers a class of securities and thereafter makes the registrant subject to ongoing reporting requirements. Registration under the Exchange Act provides information about a company and its securities but does not involve an issuance of a security and therefore does not contain disclosures related to offers, sales, issuances, plans of distribution and the like. A registration under the Exchange Act (i.e., a Form 10) is slightly more robust than an annual report on Form 10-K and much less robust than a registration statement under the Securities Act. Although subject to some comment and review, a Form 10 registration statement automatically goes effective 60 days following the date of filing.
In the AirFox and Paragon Coin settlements, the SEC is requiring both companies to file registration statements on Form 10 to register their class of tokens under the Exchange Act. Both companies will thereafter have to file periodic reports with the SEC, including quarterly Forms 10-Q with reviewed financial statements, an annual Form 10-K with audited financial statements and interim Forms 8-K upon certain triggering events. Furthermore, the companies will be subject to the proxy rules under Section 14 of the Exchange Act and insider filing and related requirements under Sections 13 and 16 of the Exchange Act. The settlement also included penalties and an agreement to compensate an investors who elect to make a claim. Interestingly, in its statement, the SEC indicates that “[T]he registration undertakings are designed to ensure that investors receive the type of information they would have received had these issuers complied with the registration provisions of the Securities Act of 1933 (“Securities Act”) prior to the offer and sale of tokens in their respective ICOs.” As described above, I don’t really agree with the statement, but I do agree that the ongoing disclosure will provide information to investors in deciding whether to seek reimbursement or continue to hold their tokens.
Investment Vehicles Investing in Digital Assets
The Investment Company Act of 1940 (“Investment Company Act”) establishes a registration and regulatory framework for pooled vehicles that invest in securities. This framework applies to a pooled investment vehicle, and its service providers, even when the securities in which it invests are digital asset securities. There are several exemptions for private pooled investment funds with Section 3(c)(1) (a fund with less than 100 investors) and 3(c)(7) (a fund with only “qualified purchasers”) being the most commonly utilized. Both exemptions prohibit the fund from making a public offering of its securities. In fact, there are no Investment Company Act exemptions where a company has engaged in a public offering. Separately, the Investment Advisors Act of 1940 (“Advisors Act”) requires the registration of managers and advisors to investment companies.
On Sept. 11, 2018, the SEC issued a settlement Order in the case involving the Crypto Asset Management LP and its principal Timothy Enneking, finding that the manager of a hedge fund formed for the purpose of investing in digital assets had improperly failed to register the fund as an investment company. The Order found that the manager engaged in an unlawful, unregistered, non-exempt, public offering of the fund. The Order also found that the fund was an investment company, and that it had engaged in a public offering of interests in the fund and thus no exemption was available. The Order additionally found that the fund’s manager was an investment adviser, and that the manager had violated the antifraud provisions of the Advisers Act by making misleading statements to investors in the fund.
This case is interesting because it provided the SEC with an opportunity to make a public announcement and provide enforcement-related guidance under the Investment Company Act and Investment Advisors Act related to digital assets for the first time. Although the Investment Company Act does not allow for an exemption where there is a public offering of securities, it does allow exempted funds to utilize Regulation D, Rule 506(c) which, in turn, allows for general solicitation and advertising. Rule 506(c) requires that all sales be strictly made to accredited investors and adds a burden of verifying such accredited status to the issuing company.
In a 506(c) offering, it is not enough for the investor to check a box confirming that they are accredited. Generally speaking, an offering that allows for general solicitation and advertising is considered a public offering (see HERE for more information). However, in a securities law nuance, the legislation implementing Rule 506(c) specifies that if all of the requirements of Rule 506(c) are satisfied, the offering will not be deemed a public offering under the Investment Company Act (see HERE).
The Crypto Asset Management LP made a mistake in that it engaged in general solicitation and advertising, but did not comply with Rule 506(c) by ensuring that all investors were accredited and verifying accredited status. This mistake gave the SEC the opportunity to issue a statement that “[I]nvestment vehicles that hold digital asset securities and those who advise others about investing in digital asset securities, including managers of investment vehicles, must be mindful of registration, regulatory and fiduciary obligations under the Investment Company Act and the Advisers Act.”
Trading of Digital Asset Securities
The SEC has brought multiple enforcement actions and has made public statements related to the secondary trading of digital assets, including the requirement to register as a national securities exchange or be exempt from such registration such as by operating as a broker-dealer ATS (see HERE). To date, although several broker-dealers are registered as an ATS, there is no operational secondary securities digital asset market place. In addition to SEC registration, broker-dealers must be members of FINRA, who regulates specific operations, including related to an ATS (see HERE and HERE).
The SEC’s recent enforcement action against the founder of EtherDelta, a platform facilitating the trading of digital assets securities, underscored the SEC’s Division of Trading and Markets’ ongoing concerns about the failure of platforms that facilitate trading in digital asset securities to register with the SEC or operate under a proper exemption from registration. According to the SEC’s order, EtherDelta, which was not registered with the SEC in any capacity, provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a smart contract run on the Ethereum blockchain. EtherDelta’s smart contract was coded to, among other things, validate order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade. The SEC found that EtherDelta’s activities clearly fell within the definition of an exchange.
An analysis as to whether an entity is operating as an exchange requires a substance-over-form facts-and-circumstances review, regardless of terminology used by the operator. For example, if a system “brings together orders of buyer and sellers” – if, for example, it displays, or otherwise represents, trading interest entered on a system to users or if the system receives users’ orders centrally for future processing and execution – it is likely an exchange. Likewise, a system that uses non-discretionary methods to facilitate trades or bring together and execute orders, may fall within the definition of an exchange.
Even if an entity is not operating as an exchange, or would not require a full ATS license, it may be required to register as a broker-dealer. Entities that facilitate the issuance of digital asset securities or their secondary trading may be required to register as a broker-dealer. Section 15(a) of the Exchange Act provides that, absent an exception or exemption, it is unlawful for any broker or dealer to induce or attempt to induce the purchase or sale of any security unless such broker or dealer is registered in accordance with Section 15(b) of the Exchange Act. Section 3(a)(4) of the Exchange Act generally defines a “broker” to mean any person engaged in the business of effecting transactions in securities for the account of others. Section 3(a)(5) of the Exchange Act generally defines a “dealer” to mean any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise. As with the “exchange” determination, a substance-over-form analysis must be applied to assess whether an entity meets the definition of a broker or dealer, regardless of how an entity may characterize either itself or the particular activities or technology used to provide the services.
Further Reading on DLT/Blockchain and ICOs
For a review of the 2014 case against BTC Trading Corp. for acting as an unlicensed broker-dealer for operating a bitcoin trading platform, see HERE.
For an introduction on distributed ledger technology, including a summary of FINRA’s Report on Distributed Ledger Technology and Implication of Blockchain for the Securities Industry, see HERE.
For a discussion on the Section 21(a) Report on the DAO investigation, statements by the Divisions of Corporation Finance and Enforcement related to the investigative report and the SEC’s Investor Bulletin on ICOs, see HERE.
For a summary of SEC Chief Accountant Wesley R. Bricker’s statements on ICOs and accounting implications, see HERE;
For an update on state-distributed ledger technology and blockchain regulations, see HERE.
For a summary of the SEC and NASAA statements on ICOs and updates on enforcement proceedings as of January 2018, see HERE.
For a summary of the SEC and CFTC joint statements on cryptocurrencies, including The Wall Street Journal op-ed article and information on the International Organization of Securities Commissions statement and warning on ICOs, see HERE.
For a review of the CFTC’s role and position on cryptocurrencies, see HERE.
For a summary of the SEC and CFTC testimony to the United States Senate Committee on Banking Housing and Urban Affairs hearing on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission,” see HERE.
To learn about SAFTs and the issues with the SAFT investment structure, see HERE.
To learn about the SEC’s position and concerns with crypto-related funds and ETFs, see HERE.
For more information on the SEC’s statements on online trading platforms for cryptocurrencies and more thoughts on the uncertainty and the need for even further guidance in this space, see HERE.
For a discussion of William Hinman’s speech related to ether and bitcoin and guidance in cryptocurrencies in general, see HERE.
For a review of FinCEN’s role in cryptocurrency offerings and money transmitter businesses, see HERE.
For a review of Wyoming’s blockchain legislation, see HERE.
For a review of FINRA’s request for public comment on FinTech in general and blockchain, see HERE.
For my three-part case study on securities tokens, including a discussion of bounty programs and dividend or airdrop offerings, see HERE; HERE; and HERE.
For a summary of three recent speeches by SEC Commissioner Hester Peirce, including her views on crypto and blockchain, and the SEC’s denial of a crypto-related fund or ETF, see HERE.
Mr. Woessner mentors, advises, and raises capital for companies in the start-up and smaller-cap company ecosphere. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, support small business, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. For more information on Mr. Woessner’s background, see this link.
Ronald WoessnerThis is a reprint of an article originally published by equities.com here.
This article discusses public policy recommendations to encourage companies to go public. These recommendations appeared in an article[1] authored by scholars at the prestigious Harvard Kennedy School (“HKS”) and published earlier this year.
Before examining these recommendations, let’s review the benefits of being a public company.
The benefits[2] of being a public company typically include
Obtaining a source of permanent capital, usually at a cost lower than other alternatives,
Providing early-stage investors an exit, allowing them to reallocate their capital and talent to other ventures,
Attracting and retaining employees by providing equity-based compensation in the form of options and stock grants and an opportunity to monetize this equity by selling into the public market,
Providing a stock “currency” that can be used for acquisitions.
While these benefits are, in theory, available to all public companies, as a practical matter these benefits are NOT available to the estimated 40% of smaller-cap NASDAQ issuers and the estimated 95+% of smaller-cap OTC-traded companies whose stocks are illiquid. These benefits are NOT available because:
Investment firms are typically reluctant to invest in a company with an illiquid stock,
If a company’s stock is illiquid, it is difficult for early investors to exit their investment position by selling shares in the open market,
Equity-based compensation has little value to an employee if the employee is not readily able to convert the equity into cash by selling the equity in the open market,
The shareholders of an acquisition target are typically unwilling to accept the acquiring company’s shares rather than cash as the “deal” consideration if they are unable to readily “monetize” most if not all of the shares by selling them in the open market.
Point being: smaller-cap companies with illiquid stocks are incurring the burdens of public company status and receiving NONE of the benefits. It’s no surprise that they are avoiding the public markets as illuminated in an earlier article of mine. As noted in this article, the disappearance of the smaller IPO (< $50M – $100M) is virtually 100% responsible for the declining number of public companies in America.
See below the FOUR Harvard Kennedy School Policy Recommendations to encourage more smaller-cap companies to go public.
Increase the Threshold for Eligibility as a Smaller-Reporting Company and Non-Accelerated Filer
Companies that have more than $75M in market cap are required to file their quarterly and annual disclosure reports within 45 days and 75 days, respectively, of the end of the reporting period. They are also required to comply with Sarbanes-Oxley (“SOX”) Section 404(b), which requires an auditor attestation of the effectiveness of the company’s internal controls – this attestation is a major cost for small companies.
The HKS Policy Recommendation is to increase the $75M threshold to a materially higher number. A company with a market cap of only $75M is a TINY company by capital market standards. An issuer typically is not considered even to be a “small-cap” company until it has a market cap of $300M (and some say not until its market cap is $500M). Increasing the threshold would provide these tiny companies additional time to prepare their quarterly and annual filings. It would also exempt them from complying with the expensive SOX 404(b) internal control auditor attestation. SEC Chairman Jay Clayton has directed the SEC staff to consider increasing the $75M threshold.[3]
Extend to 10 Years the Emerging Growth Company “On-Ramp” Exemption.
“Emerging growth companies” (“EGC”) who “go public” are currently permitted to operate for five years under lighter disclosure regulations, including NOT being required to comply with the SOX 404(b) internal control auditor attestation.[4]
The HKS Policy Recommendation is to extend from five years to 10 years the lighter disclosure period. Increasing the five-year “on-ramp” to 10 years provides EGC companies contemplating an IPO more confidence that they will have sufficient time to meet the enhanced regulatory requirements after becoming public.
H.R. 1645, the “Fostering Innovation Act” included in the JOBS 3.0 legislation approved by the House of Representatives earlier this year (but not yet approved by the Senate), extends the lighter disclosure period to 10 years.
Increase the Shareholding Required to Demand Inclusion of Shareholder Proposals in Proxy Statements.
Current law permits a shareholder who owns as little as $2,000 of a company’s stock to demand that the company include the shareholder’s proposals for vote in the company’s proxy statement for the company’s annual shareholder meeting.[5] The $2,000 shareholding amount was created more than 30 years ago and is not fit for the present day.
Shareholder proposals consume significant time and company resources to deal with, yet they cost almost nothing for shareholders to submit. A Manhattan Institute study found that in 2016, one-third of all shareholder proposals were brought by just six individual investors. This suggests that the proposals are being instigated by activist investors to promote social policy agendas, rather than to effect a bona-fide corporate governance purpose. Moreover, a proponent is allowed to resubmit a proposal on multiple occasions even if the proposal was previously rejected by a vast majority of shareholders.
The HKS Policy Recommendation is to increase the shareholder ownership requirement to a more meaningful number.
Require Mandatory Arbitration of Shareholder Claims
The fourth and final HKS Policy Recommendation is to allow companies to mandate arbitration of shareholder disputes by including such provisions in their governing documents. Companies with shareholder dispute mandatory arbitration provisions typically are NOT permitted to list on NASDAQ or NYSE.
The current system of shareholder class-action litigation is viewed by many as a mechanism to redistribute wealth from the insurance carriers, on the one hand, to the plaintiff and defense securities bar, on the other hand. Public companies and their insurers paid $55.6 billion in shareholder class-action settlements in the last 10 years.
In 2016, plaintiff’s attorneys received $1.27 billion in fees and expenses from such cases, out of the $6.4 billion in settlements.[6] Defense attorneys collect substantial fees and expenses to defend these claims as well. Very rarely, if ever, do these cases proceed to trial and they are typically settled (which enables the plaintiffs’ attorneys and defense attorneys to collect hefty fees) within the insurance policy limits.
One metric that illuminates the plaintiff attorneys’ “shakedown” character of many of these lawsuits is the frequency with which three law firms file shareholder class action lawsuits. These three law firms in 2016 filed 66% of the shareholder class action lawsuits and filed over 50% of the lawsuits during 2014 – 2017.[7] In 2016, these three firms were appointed lead counsel 36% of the time.[8]
Another metric that illuminates the “shakedown” character of many of these lawsuits is the “algorithmic” calculation of the anticipated settlement amounts. The chart below shows the predicted settlement amount as a percentage of the claimed damages amounts:[9]
The plaintiffs’ law firms know these predicted settlement amounts before they file their lawsuits – hence, they can predict before filing the suit to a reasonable degree of certainty their estimated fees once the case settles – which as noted above, virtually all of them do.
Since 2006, the Committee on Capital Markets Regulation has urged the SEC to allow corporations to include in their charters a provision requiring mandatory arbitration of issuer-stockholder disputes. [10] Former SEC Commissioner Michael Piwowar in July 2017 endorsed this as well.
The HKS Policy Recommendation is to permit companies to require that shareholder class action litigation be settled via arbitration, rather than litigation.
With arbitration, these matters can be resolved quicker and less expensively. Also, arbitration is seen as a mechanism to discourage specious or flimsy claims from being brought in the first instance – often only for the purpose of obtaining quick cash settlement from companies (and their insurers) who want to avoid the cost and management distraction of the litigation.
These were the FOUR HKS Policy Recommendations to encourage more companies to go public. While excellent suggestions, they do NOT address the root cause of the inhospitality of the public markets to smaller-cap companies.
Stay-tuned for a completely NEW policy recommendation, credited to David Weild IV, who is widely reported as being the “Father of JOBS Act 1.0,” to combat the “disappearing US public company” phenomena. This NEWpolicy recommendation will be illuminated in a subsequent article.
Mr. Woessner mentors, advises, and raises capital for companies in the start-up and smaller-cap company ecosphere. He also advocates in Washington DC for policies to help smaller-cap companies access capital and for policies that create a more hospitable public company environment for them. See here for more information on Mr. Woessner’s background.
[4] This is one of the provisions of the so-called 2012 “JOBS 1.0” law.87% of all IPOs since the enactment of JOBS 1.0 have been identified as emerging growth companies.
[5] If the company determines NOT to include the proposal, then the company is required to justify its decision.
US public companies are disappearing! This trend is 100% opposite the trend in other developed countries with similar institutions and economic development.
Many private companies avoid going public, preferring instead to “exit” their investment by selling the company, or hold off going public as long as they can.
This trend is causing US public companies to disappear. For example, US public company listings decreased over the last two decades by about 46%, from 8,090 in 1996 to 4,331 in 2016, according to a 2018 academic study from the Harvard Kennedy School.[1]
Conversely, public company listings increased by about 48% in other developed countries over a comparable period, according to another academic study in 2015. According to that study, the US “should have had” approximately 9,500 public companies in 2012, resulting in an estimated “listing gap” of approximately 5,400 companies as of 2012. The listing gap is undoubtedly higher today.
This disappearing public company trend has profoundly negative consequences for US job growth. A March 2011 report from the Department of the Treasury’s “IPO Task Force” determined that 92% of the job growth among companies who had gone public occurred after the company’s IPO.
Another negative consequence of the disappearing public company is that as public companies disappear, there are fewer public companies for mutual funds (Vanguard, Fidelity, etc.), pension funds, and the like to invest in. If current trends continue, the “S&P 500” will become the “S&P 250.”
Moreover, not only does staying private thwart US job growth, it deprives mom-and-pop “Main Street” investors of opportunities to invest at the early stage of a business and reap significant gains in value during the business’ early, private years.
To wit, Uber and AirBnB are two well-known companies that have not yet gone public and whose investors (principally Silicon Valley and Wall Street investment firms and high-net worth individuals) are poised to make HUGE sums of money on their investments. In this regard, note the recent news reports that Uber’s proposed IPO market valuation is $120 BILLION. “Main Street” investors will made ZERO from the success of these (and similar) venture capital funded companies because these investment opportunities and similar ones are not made available to them. This statement is not a criticism of the investors who stand to make an enormous amount of money (after all they took a risk with their money and are entitled to a return) – it is simply a statement of fact.
As a counterweight to this trend of income being redistributed to Silicon Valley and Wall Street investment firms and high-net worth individuals, SEC Chairman Jay Clayton wants to let more “Main Street” investors participate in private deals. Within recent months he was quoted in The Wall Street Journal as saying:
Many companies have shunned the public markets in favor of private investors,
Regulators have for decades typically walled off most private deals from smaller investors, who must meet stringent income and net worth requirements to participate,
The SEC is now weighing a major overhaul of rules intended to protect mom-and-pop investors, with the goal of opening up new investment options for them.
We thank Chairman Clayton for recognizing the need for SEC policies that permit more Main Street investors to invest in private deals. But — permitting more Main Street investors to invest in privatedeals does NOT fix the problem of the declining number of US public companies.
CAUSES OF THE “DISAPPEARING” US PUBLIC COMPANY
So, what is behind the precipitous fall in the numbers of US public companies over the past decades? The following factors have played a significant role in this alarming trend:
More and more companies are turning to the private markets for their capital needs. According to a 2017 Report by the Department of the Treasury, from 2012 through 2016, the debt and equity capital raised through private offerings was 26% higher than that raised through the public markets.
Smaller-cap companies are not going public. The small (less than $50M – $100M) IPO has practically disappeared. The number of small IPOs averaged 401 in the 1990s, but then dropped to only 105 annually in the 18 years since. In the 1990s, small IPOs comprised 27% of capital raised in the public markets, whereas in the period from 2000 to present they have comprised only 7% of all capital raised. In fact, research shows that the collapse of the smaller IPOs is ~100% responsible for the listing gap between the current number of US public companies and the number of public companies the US “should have.”
Why are smaller-cap companies not going public or delaying going public until they are larger-cap companies? Answer: because the public company ecosphere is “inhospitable” to smaller-cap public companies, as evidenced by the below:o Regulatory requirements of Sarbanes – Oxley and Dodd-Frank are burdensome
o Smaller-cap companies are vulnerable to “bear raid” attacks by short sellers
o There is little to no sell-side investment analyst coverage
o Buy-side investing trends have changed whereby retail investors are moving to mutual funds, rather than investing in individual stocks
o The threat of class-action lawsuits is a deterrent
o The public company reporting (Form 10Q, 10K, 8K) requirement is a deterrent
As if the preceding reasons were not deleterious enough: public markets also are inhospitable to smaller-cap companies for the following reason: once publicly-traded, the stocks of many smaller-cap companies are likely to be illiquid[2]; and for companies with an illiquid stock, it is virtually impossible to raise non-toxic capital from investment firms because investment firms are reluctant to invest in smaller-cap, illiquid stocks.[3]
Private company CEOs and CFOs look at all of these in-hospitability factors and determine they simply don’t want to be a public company.
Despite the foregoing, smaller-cap companies can thrive in the public markets. If you are a CEO or CFO of a smaller-cap company with an illiquid stock and your company is struggling to raise non-toxic capital => don’t despair! A subsequent article will provide you specific, actionable recommendations for increasing your company’s stock liquidity.
Subsequent articles will also unveil a policy solution that, if implemented, will reverse the trend of The “Disappearing” US Public Company!
[2] According to a 2018 SEC study of thinly-traded securities, 3,500 of 8,700 NMS-traded securities had a dismal, median average daily volume of < 50,000 shares per day.The trading volumes of OTC-traded stocks are even more dismal. A subsequent article will provide more detail regarding these dismal trading volumes.
[3] Lack of trading liquidity makes it virtually impossible for investment firms initially to invest through the open market without affecting the stock price – similarly, lack of liquidity makes it virtually impossible for them to exit an investment position through the open market. See an earlier article here that addresses this topic in more detail.
This is a reprint of an article by Mr. Woessner published on December 12, 2018 by equities.com at this link.
Mr. Woessner mentors, advises, and helps raise capital for companies in the start-up and smaller-cap company ecosphere. He also advocates for policies to help smaller-cap companies access capital and for policies that create a more hospitable public company environment for them. For more information on Mr. Woessner’s background, see https://www.linkedin.com/in/ronald-woessner-3645041a/.
See below for an article by Cromwell Coulson, President, CEO and Director of OTC Markets Group, regarding “Understanding Short Sale Activity.”
Quality data is essential to well-functioning markets. Improving the availability, relevance and usefulness of data aligns with OTC Market Group’s mission to create better informed, more efficient financial markets. In our experience, short selling remains one of the most highly-debated topics among academics, companies, investors, market makers and broker-dealers. As a market operator and company CEO, I believe it’s critical to address the misconceptions that still exist around short sale data and the correlation to a stock’s fundamental value.
Short selling, the sale of a security that the seller does not own, has long been a controversial practice in public markets. Advocates for short selling believe it builds price efficiency, enhances liquidity and helps improve the public markets, while critics are concerned that it can facilitate illegal market manipulation and is detrimental to investors and public companies. Given the diverse range of opinions and opposing views, we believe the first step is to take a deeper dive into the data and help separate out the noise.
“The Reliable” – FINRA Equity Short Interest Data
The most accurate measure of short selling is the data reported by all broker-dealers to FINRA on a bi-weekly basis. These numbers reflect the total number of shares in the security sold short, i.e. the sum of all firm and customer accounts that have short positions.
This information is available on www.otcmarkets.com on the company quote pages. As an example, OTC Markets Group has a few hundred shares sold short on average, which represents a fraction of our daily trading volume and shares outstanding.
OTC Markets Group (OTCQX: OTCM) SHORT INTEREST Data
DATE
SHORT INTEREST
PERCENTAGE CHANGE
AVG. DAILY SHARE VOL
DAYS TO COVER
SPLIT
NEW ISSUE
9/28/2018
97
11.49
5,551
1
No
No
9/14/2018
87
8.75
4,423
1
No
No
8/31/2018
80
100.00
6,818
1
No
No
7/31/2018
103
-48.24
3,197
1
No
No
7/13/2018
199
-27.64
2,124
1
No
No
6/29/2018
275
166.99
3,239
1
No
No
6/15/2018
103
24.10
2,739
1
No
No
5/31/2018
83
-72.33
3,925
1
No
No
5/15/2018
300
1.69
3,944
1
No
No
4/30/2018
295
100.00
4,278
1
No
No
FINRA Rule 4560 requires FINRA member firms to report their total short positions in all over-the-counter (“OTC”) equity securities that are reflected as short as of the settlement date. In 2012 FINRA clarified that firms must report short positions in each individual firm or customer account on a gross basis under FINRA Rule 4560. Therefore, firms that maintain positions in master/sub-accounts or parent/child accounts must calculate and report short interest based on the short position in each sub- or child account.
Since this data is part of a clearing firm’s books and records, it is of high quality and FINRA regularly inspects broker-dealer compliance with the rule. Of course, it would be great if this data was collected and published daily (with an appropriate delay).
“The Misleading” – Daily Short Volume
In contrast, the most frequently misinterpreted data is the Daily Short Volume, sometimes referred to as Naked Short Interest. This data shows the percentage of published trade reports (called media transactions in FINRA Rules) that were marked short. As an example, the recent data for OTC Markets Group shows that up to 90% of the trading volume comes from short
selling on some days. If we did not carefully track our bi-weekly Short Interest, we could easily be led to believe that short selling is rampant in our stock.
Historical Short Volume Data for OTC Markets Group (OTCQX: OTCM)
DATE
VOLUME
SHORT VOLUME
PERCENTAGE of VOL SHORTED
Oct 18
3,341
1,399
41.87
Oct 17
5,989
3,198
53.40
Oct 16
16,120
7,509
46.58
Oct 15
24,155
12,991
53.78
Oct 12
6,297
4,914
78.04
Oct 11
4,059
1,553
38.26
Oct 10
2,185
999
45.72
Oct 9
7,473
4,556
60.97
Oct 5
880
525
59.66
Oct 4
492
200
40.65
Oct 3
2,041
801
39.25
Oct 2
4,786
1,560
32.60
Oct 1
3,973
2,607
65.62
Sep 28
244
23
9.43
Sep 27
882
805
91.27
Sep 26
259
189
72.97
Sep 25
3,085
2,250
72.93
Sep 24
967
571
59.05
Sep 21
2,350
825
35.11
Sep 20
7,164
6,453
90.08
Sep 19
297
202
68.01
Seeing the above data can be alarming for public companies and their investors, until they understand the inner workings of how dealer markets function and broker trades are reported—which render the data virtually meaningless.
Since this data also comes from FINRA, what gives? The daily short selling volume is misleading because market makers and principal trading firms report a large number of trades as short sales in positions that they quickly cover. For market makers with a customer order to sell, they will temporarily sell short (which gets published to the tape as a media transaction for public dissemination) and then immediately buy from their customer in a non-media transaction that is not publicly disseminated to avoid double counting share volumes. SEC guidance also mandates that almost all principal trading firms that provide liquidity at multiple price levels, or arbitrage international securities, must mark orders they enter as short, even though those firms might also have strategies that tend to flatten by end of day. Since the trade reporting process for market makers and principal trades makes the Daily Short Volume easily misleading, we do not display it on www.otcmarkets.com.
Making daily short reporting data easily-digestible and relevant is not hard. On the contrary, it should be easy to aggregate all of the short selling that is reported as agency trades, as well as all of the net sum of buying and selling by each market maker and principal trading firm. This would paint a clear picture for investors of overall daily short selling activity. Fixing the misleading daily short selling data would bring greater transparency and trust to the market.
“The Missing Piece”– Short Position Reporting by Large Investors
There is ample evidence that short selling contributes to efficient price formation, enhances liquidity and facilitates risk management. Experience shows that short sellers provide benefits to the overall market and investors in other important ways which include identifying and ferreting out instances of fraud and other misconduct taking place at public companies. That said, we
agree with the New York Stock Exchange and National Investor Relations Institute that there is a serious gap in the regulation of short sellers related to their disclosure obligations. We understand that well-functioning markets rely on powerful players who cannot be allowed to hide in the shadows. Since we require large investors, who accumulate long positions, to publicly disclose their holdings, why aren’t there disclosure obligations for large short sellers? This asymmetry deprives companies of insights into their trading activity and limits their ability to engage with investors. It also harms market functions and blocks investors from making meaningful investment decisions.
One point is clear, we all need to continue to work collaboratively with regulators to improve transparency, modernize regulations and provide investors with straightforward, understandable information about short selling activity. We want good public data sources that bring greater transparency to legal short selling activity as well as shine a light on manipulative activities. All while not restricting bona fide market makers from providing short-term trading liquidity that reduces volatility.
Cromwell Coulson
R. Cromwell Coulson – P resident, Chief Executive Officer and Director of OTC Markets Group(OTCQX:OTCM) R. Cromwell Coulson is President, CEO and a Director of OTC Markets Group, responsible for the company’s overall growth and strategic direction. Cromwell is a strong advocate of improving access to capital for small companies, supporting a diverse ecosystem of broker-dealers, and empowering investors with information. He has testified before Congress and spoken on these and other issues at numerous industry conferences. Cromwell is a former Chair (2017-2018) of the FINRA Market Regulation Committee that advises FINRA on rulemaking and trading issues. Prior to OTC Markets, Cromwell was an institutional trader and portfolio manager at Carr Securities Corporation. He holds an OPM from Harvard Business School and received his BBA from Southern Methodist University.
MONDAY, DECEMBER 10TH
On Monday, the House will meet at 12:00 p.m. for morning hour and 2:00 p.m. for legislative business. Votes will be postponed until 6:30 p.m.
One Minute Speeches
Legislation Considered Under Suspension of the Rules:
1) H.R. 5513 – Big Bear Land Exchange Act, as amended (Sponsored by Rep. Paul Cook / Natural Resources Committee)
2) H.R. 6108 – Preserving America’s Battlefields Act, as amended (Sponsored by Rep. Jody Hice / Natural Resources Committee)
3) H.R. 3008 – George W. Bush Childhood Home Study Act (Sponsored by Rep. Michael Conaway / Natural Resources Committee)
4) H.R. 6118 – To direct the Secretary of the Interior to annually designate at least one city in the United States as an American World War II Heritage City, and for other purposes, as amended (Sponsored by Rep. David Rouzer / Natural Resources Committee)
5) H.R. 6665 – Offshore Wind for Territories Act, as amended (Sponsored by Rep. Madeleine Bordallo / Natural Resources Committee)
6) H.Res. 792 – Urging the Secretary of the Interior to recognize the historical significance of Roberto Clemente’s place of death near Piñones in Loíza, Puerto Rico, by adding it to the National Register of Historic Places, as amended (Sponsored by Rep. José Serrano / Natural Resources Committee)
7) S. 245 – Indian Tribal Energy Development and Self-Determination Act Amendments of 2017 (Sponsored by Sen. John Hoeven / Natural Resources Committee)
8) S. 825 – Southeast Alaska Regional Health Consortium Land Transfer Act of 2017 (Sponsored by Sen. Lisa Murkowski / Natural Resources Committee)
9) S. 2511 – CENOTE Act of 2018, as amended (Sponsored by Sen. Roger Wicker / Natural Resources Committee)
10) H.R. 6893 – Secret Service Overtime Pay Extension Act, as amended (Sponsored by Rep. Steve Russell / Oversight and Government Reform Committee)
11) House Amendment to S. 2248 – Veterans Benefit and Transition Act of 2018 (Sponsored by Rep. Phil Roe / Veterans Affairs Committee)
WASHINGTON – Financial Services Committee Chairman Jeb Hensarling (R-TX) delivered the following speech on the House Floor today, urging the Senate to pass the “JOBS & Investor Confidence Act of 2018,” otherwise known as the JOBS Act 3.0:
“I come here today, Mr. Speaker, and I picked up a copy of this morning’s edition of the Wall Street Journal. Many Americans would consider it to be the most influential newspaper in America; but certainly at least on economic matters, I think, most would agree.
I just happened to read the lead editorial today, Mr. Speaker, and it says that the House, this body, “has done yeoman’s work shepherding bipartisan bills to expand access to capital.” Most influential paper in America. There’s a lot in between but let me go to the last sentence where it says, “The Senate shouldn’t scuttle what could be one of this congress’s better achievements.” That’s in today’s Wall Street Journal, Mr. Speaker, and the Journal’s talking about JOBS 3.0. It’s a bill that came out of this body 406-4, and its purpose, Mr. Speaker, is to promote small business, to promote entrepreneurial capitalism, to promote venture capital. Again, Mr. Speaker, it came out of this body 406-4. We couldn’t get 406-4 votes on a Mother’s Day resolution. And yet it languishes on that side of the Capitol.
So I’ve been in this body for 16 years, Mr. Speaker, and I’ve learned a few things. One of the things I’ve learned is never underestimate the Senate’s capacity to do nothing. And unfortunately, so far, the United States Senate has done nothing on a bill that passed 406-4.
Mr. Speaker, thanks to the leadership of President Donald Trump, thanks to the leadership of Speaker Paul Ryan, thanks to the leadership of Chairman Kevin Brady, we have what for most Americans – not all, but for most Americans – is the greatest economy they have had in their entire lifetime. Unemployment at a 50-year low. Cutting across all socioeconomic groups. Small business optimism, consumer optimism, off the charts. We are seeing more people come back into the labor force, and this is all great news.
But we cannot be blinded by the fact that as good as the economy is of today, we still have to concentrate on the economy of tomorrow. And we need to know, can we ensure that the seed capital is there? Can we make sure that our public policy nourishes the drivers of tomorrow’s economy, the next Amazons, the next Googles, the next Ubers; where are they going to come from?
So unfortunately, Mr. Speaker, what we have seen is that as recently as 2016, as recently as 2016, startups in America have been cut in half. And oh, incidentally the securities regulatory burden has increased by over 50% in the last 10 years, and by over 80%. It now costs, Mr. Speaker, twice as much to go public today as it did 10 years ago.
And what do we see? We see half the number of companies going public. They don’t seem to have that problem in China, Mr. Speaker, because China has over 1/3 of the world’s I.P.O.’s or initial public offerings.
Yet the United States, our I.P.O.’s have been cut in half. That’s why it’s so important that every Congress, every Congress we go back and we ensure that our securities laws are written in such a way that we make sure that entrepreneurial capitalism can’t just survive in America, but absolutely thrive. So I come to this floor again to ask that our colleagues on the other side of the Capitol, and I have many friends in that body, but I am often confused why, why they cannot act on something that has received incredible, incredible support in the House.
Mr. Speaker, November is National Entrepreneurship Month. There’s only two days left in the month. So I hope that my voice can be heard on the other side of the Capitol, and I would ask the United States Senate to immediately take up the JOBS 3.0 Act, and make sure that the economy of tomorrow for our children and grandchildren is as healthy and thriving as the economy of today.”
On May 23, 2018, as directed by Congress pursuant to the Fair Access to Investment Research Act of 2017, the SEC proposed a new rule under the Securities Act of 1933.
If adopted, the proposal would establish a safe harbor for an unaffiliated broker or dealer participating in a securities offering of a “covered investment fund” to publish or distribute a “covered investment fund research report.” If the conditions for the safe harbor are satisfied, this publication or distribution would be deemed not to be an offer for sale or offer to sell the covered investment fund’s securities for purposes of sections 2(a)(10) and 5(c) of the Securities Act of 1933.
The SEC also proposed a new rule under the Investment Company Act of 1940. This proposal would exclude a covered investment fund research report from the coverage of section 24(b) of the Investment Company Act (or the rules and regulations thereunder), except to the extent the research report is otherwise not subject to the content standards in self-regulatory
organization rules related to research reports, including those contained in the rules governing communications with the public regarding investment companies or substantially similar standards.
Public comments on the proposal were required to be submitted to the SEC on July 9, 2018.
OTC Markets Group Participates in SEC Roundtable Sponsored by the Division of Trading and Markets
On September 26, OTC Markets Group was pleased to take part in the SEC’s Roundtable on Regulatory Approaches to Combating Retail Investor Fraud, hosted by the Division of Trading and Markets. OTC Markets Group CEO Cromwell Coulson participated in a panel discussion on Trading Halts and General Counsel Dan Zinn spoke on a panel focused on Rule 15c2-11 and enhancing public disclosure requirements.
“Fraudulent and manipulative promotion schemes corrupt the efficient market pricing process, hinder small company capital formation, and harm retail investors,” said Cromwell Coulson, CEO. “Because regulation alone cannot address all sources of fraud, we must empower individuals with the information they need to make better-informed investment decisions. Shining the electric light of data-driven markets that incentivize corporate disclosure, combined with common-sense regulation, are the most effective investor protection tools.”
In conjunction with their participation in the Roundtable, OTC Markets Group submitted a list of targeted Regulatory Recommendations that would help to combat retail investor fraud, improve market efficiency and bring greater transparency to our public markets.
US public companies are disappearing! This trend is 100% opposite the trend in other developed countries with similar institutions and economic development.
