Empowering Smaller Public Companies in the Capital Markets

As markets adapt to the uncertainty surrounding the coronavirus pandemic and subsequent vaccine rollout efforts, companies of all sizes look to the public markets to raise capital. Entering the new year, the IPO momentum continues, as has the resurgence of Special Purpose Acquisition Companies (SPACs). But while SPACs allow many smaller companies the opportunity to go public earlier, these companies still face steep burdens that pose a significant challenge to joining the markets. To mitigate these obstacles, innovative solutions, such as further disclosure reform and intelligent ticks, are needed to empower smaller companies.

Recently, Jeff Thomas, senior vice president and head of Western U.S. Listings and Capital Markets at Nasdaq, participated in a panel discussion at the SEC’s Small Business Capital Formation Advisory Committee meeting, during which he elaborated on the current trends for smaller companies. He noted that of Nasdaq’s 316 initial public offerings in 2020, 128 were companies with a market cap of less than $250 million on their first trading day. Of that select group, 89 were SPACs and 39 were operating companies. The latter of which, on average, raised $25 million for a total of $1 billion in capital. At the end of the year, out of Nasdaq’s 3,500 U.S. listed companies, approximately 1,100 had a market cap of $250 million or less.

Thomas noted that SPACs appear to be an advantageous vehicle for earlier stage companies to go public because the companies can provide projections in connection with the merger, as opposed to only being able to provide historical financials in a traditional IPO. While SPACs have provided a new path for smaller companies to go public, Thomas acknowledged that there are many reasons why smaller companies would delay entering the public markets.

“When we think about some of the challenges facing smaller companies, one thing we consistently hear from issuers is the increased cost of director and officer insurance and that it inordinately affects small-cap companies. So that’s one issue we think could have some room for innovation or some change,” Thomas said. “But also, the disclosure and reporting requirements for small-cap companies, given their limited in-house resources, can often present a challenge.”

Over the past year, Thomas said there has been a significant shift in the focus on environmental, social and governance (ESG) reporting, noting that “many more companies are asking for help in terms of how do they tackle this, in terms of how do they determine which metrics are appropriate to be reporting on, and how do they operationalize that.”

While Thomas applauded the SEC’s recent actions regarding proxy advice reform and disclosure requirements for certain new and smaller companies, given the current trading environment, he urged the commission to reconsider Nasdaq’s proposals outlined its Revitalize blueprint. Specifically, he highlighted proposals that would require short sellers to disclose their positions alongside long investors on 13-F SEC filings, as well as recommendations to modernize the market structure.

“We’ve heard a number of times about the challenges around liquidity and trading in the trading environment facing small-cap issuers,” he continued. “Nasdaq [has] submitted a proposal that would allow for the termination of unlisted trading privileges for smaller-cap companies, which would centralize liquidity on a single venue and, we believe, create greater incentives—incentives to create markets in those areas and provide better price discovery by concentrating disaggregated liquidity into a single exchange that allows investors better to better source liquidity, enjoy a higher level of transparency, and thereby help small-cap companies raise capital and have a better trading market.”

Furthermore, Thomas said that Nasdaq’s recommendations around tick sizes would be particularly beneficial for smaller public companies.

“We recommended a market-based approach where no tick would be wider than a stock’s average quoted spread. There would be a series of six intelligent tick sizes that would be evaluated by the listing exchange on a semiannual basis. This, again, would allow more liquidity to pool at those intelligent ticks, and that would be especially impactful for smaller-cap companies who generally have a lower share price,” he said.

With 2021 off to an even faster start in terms of companies looking to go public, Thomas emphasized that “flexibility for exchanges to innovate in order to improve the trading of thinly traded securities and provide incentives to trade in certain stocks is vital for small-cap and micro-cap issuers.”

Other Topics

Policy & Regulation Public Companies Nasdaq-Listed Companies

MarketInsite

Nasdaq

Nasdaq’s Marketinsite offers actionable insights on a variety of market-moving topics. Learn from our thought leaders who are driving the capital markets of tomorrow.

Read MarketInsite's Bio