On Sept. 13, 2011, the Securities and Exchange Commission ("SEC") announced the formation of the Advisory Committee on Small and Emerging Companies("Advisory Committee") to focus on interests and priorities of small businesses and smaller public companies; pointedly the mandate was to advise on rules, regulations and policies pertaining to emerging companies, privately-held small businesses, and publicly traded companies with less than $250 million in public market capitalization. Among the specific topics on which the Advisory Committee's guidance was sought were:
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As initially reported, the roster for the Advisory Committee comprised:
New Equity Market
On February 1, 2013, the Advisory Committee unanimously recommended to the SEC the creation of a separate U.S. equity market that would purportedly facilitate trading in the securities of small and emerging companies. The recommendation was formally conveyed to the SEC on March 21, 2013, the substance of which is reprinted below:
AFTER CONSIDERING THAT:
THE COMMITTEE RECOMMENDS THAT:
The Commission should facilitate and encourage the creation of a separate U.S. equity market or markets that would facilitate trading by accredited investors in the securities of small and emerging companies, and such small and emerging companies would be subject to a regulatory regime strict enough to protect such investors but flexible enough to accommodate innovation and growth by such companies.
Bill Singer's Comment
Okay, so we have yet another blue ribbon panel coming out with yet another batch of recommendations to yet another government organization. Like what - we haven't been through this revolving door before with far too many other well-intentioned private-sector-meet-the-public-sector efforts? Does the name National Commission on Fiscal Responsibility and Reform ring a bell? Howsabout if I refer to it by its more common names: Bowles-Simpson or Simpson-Bowles? Yeah, like that got much traction.
For some reason, we have this penchant for setting up a plethora of roundtables, panels, committees, and the ever-popular subcommittees as a substitute for truly tackling problems with workable solutions. In the end, these feel-good, make-work undertakings result in little more than an unending stream of white papers filled with broad brush recommendations that never quite seem to attract the full support of the organizations to which the political hot potatoes are handed off to - and, even more exacerbating, by the time the watered down draft rules and regulations come under Congressional scrutiny, little, if anything, survives.
So, with all due respect to the good folks on the Advisory Committee, what have you all truly accomplished?
Maybe, Perhaps, What If, And Much Wondering
The Advisory Committee tells us that it believes our equity markets often fail to provide sufficient liquidity to smaller listings because of onerous listing requirements. We've heard such a complaint for many years and have similarly heard many proposals from Dutch Auctions to crowdfunding. I'm not sure that I necessarily see any convincing cause-and-effect between what you deem as onerous listing requirements and a lack of liquidity.
As an active trader myself, I rarely, if ever, stayed out of the market or went in because of a listing requirement; moreover, given all the crap parading in the markets as legitimate companies, I'm not sure that we necessarily need to open the taps for more untreated sewage. Frankly, the Facebook/NASDAQ meltdown, the Flash Crash, and the Knight Capital and BATS disasters likely discouraged more investors from the markets than any listing requirements. Have you committee members thought through the architecture and compliance regime that would be needed to handle small firm listings in a separate venue in order to avoid more of the same that has plagued the larger marketplaces such as the New York Stock Exchange or NASDAQ?
In a fairly conclusory fashion, the Advisory Committee opines that the lack of satisfactory trading venues discourage smaller firm IPOs. While I concur, to an extent, that the inability to attract public funding undermines entrepreneurship, I am also old enough to recall what you seem to recall as the halcyon days of the 1980s and 1990s when IPOs were all the rage and boiler-rooms and pennystocks proliferated. I would respectfully suggest that you need to propose a formidable bulwark against the onslaught of pump-and-dump and naked shorting that would inevitably accompany the launch of a new market venue for smaller listings - and I do not see the details embedded in your recommendation. Are you not concerned about adding more fuel to a still raging fire?
In theory, I support your call for a separate U.S. equity market specifically for the securities of small and emerging companies; and, I would note, that was a suggestion I had made over a decade ago when I proposed "incubator" markets - the equivalent of the minor league farm system for Wall Street. On the other hand, the more the merrier is not the prescription for the recent ills of Wall Street. And let's not forget that the NYSE and NASDAQ are not exactly going to sit on their hands and on the sidelines while all this new business is being divvied up for some newfangled market that will become a siphon of whatever liquidity is still extant.
Among your suggestions - which even your recommendation tepidly characterizes as "a possible feature of an appropriate regulatory regime"- is to limit investor participation on the new exchange to so-called accredited investors. Given that we have accumulated a history of abuse of that standard, which has been on the books for a long time, it may have been more helpful for your recommendation to explain why you have confidence in the ability to now police an issue that has bedeviled regulators and investors for decades.
Ultimately, I must wonder whether the Advisory Committee is simply trying to put new wine into old wineskins, with the likely result that these proposals will simply burst through whatever regulatory regime will be in place. I wish that someone had the courage to ask whether the quaint concept of an equity market has much vitality in the 21st Century - and whether amassing a panel of folks inculcated into the old ways and concepts of raising capital was calculated to produce visionary brainstorming. Sadly, what I do see in this recommendation is finger pointing at a failed market structure, for which I respond with an approving thumb's up. What I don't see are any specifics. All of which leaves an already beleaguered SEC with the task of drafting more rules and submitting them to a fractured group of commissioners, who probably will stalemate on any approval. Of course, should the commissioners manage to agree on anything, good luck getting our useless Congress to approve any new laws.