Bill Singer's Comment: Yesterday, I received an interesting email from Grant Thornton LLP's Capital Markets Group concerning their take on the ongoing challenges for U.S. Initial Public Offerings and the ramifications of that problem. Authors Weild and Kim propose a modernized market structure as a possible solution for the difficulties many companies are now facing when attempting to go public. Frankly, it's a very compelling piece and I have reprinted it verbatim for your consideration.
Grant Thornton Announces Update to U.S. IPO Market Study
Dysfunctional Market Structure Fuels Unemployment and Undercuts Small Cap IPOs
June 21, 2010 NEW YORK - Grant Thornton LLP's Capital Markets Group today announced the release of Market structure is causing the IPO crisis - and more, the groundbreaking study with new and updated data that further analyzes the initial public offering crisis, including its impact on unemployment in the U.S., and solutions to reinvigorate the growth economy through improvements to equity market structure.
David Weild, Senior Capital Markets Advisor at Grant Thornton, founder of Capital Markets Advisory Partners and former NASDAQ vice-chairman, and Grant Thornton Senior Capital Markets Advisor Edward Kim, authors of the white paper, provide insights into the state of the IPO market. The new analysis looks at how the IPO market structure drives job losses, and it addresses misconceptions about the impact of private equity, penny stocks and inflation on new public equity offerings.
Building upon Grant Thornton's original 2008 study, Why are IPOs in the ICU?, Weild and Kim propose a new investor and issuer opt-in stock market that would be subject to full regulatory oversight from the SEC and would bring choice in market structure back to the U.S. equities markets.
Attributes of the new market include:
· Opt-in/freedom of choice - Issuers could choose whether to list in the alternative equity market or in the traditional equity market. Investors, too, could choose the market in which they wish to participate.
· Public - Unlike the 144A market, it would be open to all investors.
· Regulated - It would be subject to the same SEC corporate disclosure, oversight and enforcement as existing markets.
· Quote-driven - It would be a market supported by market makers, much like the dealer markets of a decade ago.
· Minimum quote increments (spreads) at $0.10 and $0.20 and minimum commissions - Unlike today's penny spread market, the new market would have minimum spreads and commissions - subject to regular review - that are designed to bring sales, research and liquidity support back to small cap stocks in particular.
· Broker-intermediated - Investors could not execute direct electronic trades in this market; buying and selling stock would require a call, an electronic indication or order through a brokerage firm, thereby preserving adequate economic support for research, sales and liquidity support.
· Research requirement - Firms making markets in these securities would be required to provide equity research coverage that meets minimum standards.
"Small cap companies and investors have been harmed by one-size-fits-all market structure. Even participants in the recent SEC Roundtable on Equity Market Structure admitted that today's electronic markets have left small cap stocks behind. The market for underwritten offerings is now closed to 80% of the companies that need it most. As a result, the lack of access to capital is contributing to job losses cascading into private enterprise and adding to the nation's unemployment rate," said Mr. Weild.
Grant Thornton's research revealed a dramatic decline in the number of companies that went public over the last decade. In the period leading up to the Dot-Com Bubble, there were 520 IPOs each year. Following the Dot-Com Bubble, the average number of new issues declined 75% to 126 annually.
While macroeconomic factors are often viewed as having contributed to the decline in new equity issuance, the report makes clear that even during robust economic times, the capacity of the stock market to support IPOs is a fraction of what it was in the ‘90s. In fact, 2009 - which was expected to be a rebound year - was one of the worst IPO markets in the last 40 years, with only 61 IPOs. Wall Street's increased focus on high-speed trading and larger-cap companies, coupled with decreased equity research coverage and sales support for small-cap businesses, is undercutting the ability of many companies to maintain adequate visibility with investors to support share prices.
The report further demonstrates that the decline in small IPOs has not been exaggerated by the impact of either inflation or changes in penny stock issuance and is, in fact, a significant market phenomenon. It also dispels the notion that private equity activity is responsible for the secular decline in the number of publicly listed companies on the NYSE and NASDAQ.
"One big misconception is that the explosive growth in private equity has siphoned off companies from the public markets. While the level of IPO and public-to-private transactions by private equity firms increased from 2004-2007, the ratio of IPOs to public-to-private activity held fairly constant. In fact, public-to-private transactions accounted for only a minority of delisting activity," said Mr. Kim.
About Grant Thornton LLP
The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity. In the U.S., visit Grant Thornton LLP at www.GrantThornton.com.
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