On June 20, 2012, the House
Committee on Financial Services held a hearing to review issues affecting the
performance and utility of the securities markets. A major item on the agenda included a review
of what additional steps could be taken to improve the quiet state of the Initial
Public Offering, or IPO, market. The
Committee had earlier this year exercised a leadership role in the passing of
one of the only bipartisan bills in recent memory - the JOBS (“Jumpstart Our
Business Startups”) Act. The JOBS Act
represents a significant rethinking of securities laws to create a new path for
nascent pre-IPO companies to raise seed capital
from public investors without meeting many of the reporting and other
requirements previously in place.
The Financial Services Committee is
now considering the role that minimum trading increments, or price ticks, have in
building a new public company’s ability to enjoy a liquid secondary
market. A price tick is the minimum
difference between the price for which a stock can be bid to be purchased and
the price at which it can be offered for sale.
Certainly, the confidence that a would-be reporting company has in being
able to attract investors - not only though its business plan and financial
performance – but, also in the efficiency of entering and exiting an investment
in the company’s stock, is a critical consideration for a corporation making
the decision to “go public” or not. Thus,
it is an important issue for the Committee’s consideration.
New public companies face a
daunting road. [1] How important is it for the pendulum to start
swinging back to encourage more companies to use the public markets? In the House Committee’s recent hearing,
Jeffrey M. Solomon, Chief Executive Officer of Cowen & Co., cited in his
prepared testimony statistics that showed a 28 percent decline in the number of
U.S. public companies from 1991 to 2011, a drop-off from 6,943 to 4,988.[2]
For the United States to lose more
than a quarter of its public companies in the span of a generation is
eye-popping. However, based on Congress
passing the JOBS Act legislation and showing an ongoing interest in additional
positive steps like modifying tick sizes for some companies, Congress is
showing meaningful concern about the role of securities regulation on capital
formation. These actions are a very
welcome step in beginning to address the problem.
The focus on tick sizes for smaller
and new public companies may seem like a small matter, but having Congress examine how the market structure of securities trading can be either a
catalyst or a drag on capital formation is extremely worthwhile. For select stocks, whether new or thinly
traded, the goal of wider ticks is to attract market makers to provide greater
liquidity by allowing them to make a profit on the bid/ask spread of a
security. New issues of securities that
are developing a following, or stocks that have been listed for some time but
“trade by appointment” – a polite way to say they are illiquid – can benefit by
drawing the participation of liquidity providers who would otherwise not make
markets in that stock because of a lack of trading opportunity.
Whether the tick difference is a
nickel, a dime or a quarter can be left to the exchanges or to the issuers, but
Congress must assure that there is a mechanism to make tick sizes for affected
stocks consistent across trading venues.
In addition, sub-penny pricing should not be allowed to infiltrate the
trading in stocks with wider tick sizes as has been the case with securities
listed in the broader market. Sub-penny
pricing, once thought to be a means to bring price improvement to investors who
place market orders, namely retail investors, has become too often a means of confusing
and disadvantaging the retail client rather than helping him.
Appropriate changes in regulation
to foster capital formation can have a profoundly positive effect on the
confidence business has in the government’s economic stewardship of the economy. Hopefully, the current focus on the state of
capital formation will continue.
[1]
See my opinion pieces e.g. “Sarbanes-Oxley Is a Curse for Small Cap Companies,”
Wall Street Journal, August 15, 2005, http://online.wsj.com/article/0,,SB112406088194912851,00.html,
and “America’s Regulations Are Scaring the Sox off Small Caps,” Financial
Times, August 1, 2006, http://www.ft.com/intl/cms/s/0/26a51a40-20fa-11db-8b3e-0000779e2340.html#axzz1ypU7Yo4N.
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