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The Securities Edge Securities Blog for Middle-Market Companies

SEC advisory committee to recommend formation of small company securities exchange

Posted in Capital Raising

 

Stock Exchange

Panorama of Wall Street Historic District by Michael Daddino

An SEC advisory committee is likely to recommend that that the SEC support the formation of a new securities exchange designed especially for small cap and micro cap public companies. While this new exchange is a long way from approval and operation, strong SEC support could substantially increase its chances of successful implementation. This securities exchange could reduce costs and create new liquidity and capital raising opportunities for these companies.

It is too early to predict whether this new securities exchange will become a reality or how effective it may be. I believe, however, that this exchange concept is another potentially positive event for small companies and that it could produce significant benefits. This securities exchange, along with certain components of the JOBS Act, could provide significant opportunities for small companies to generate liquidity in their securities and raise additional capital for growth.

The SEC advisory committee that is making this recommendation is the Advisory Committee on Small and Emerging Companies. This Committee is made up of 20 individuals with connections to the small public company space, including business executives, state regulators and, angel investors. Christine Jacobs, co-chair of the Committee, is the CEO of a Theragenics Corp., a small cap medical device manufacturer. The Committee was formed in 2011 to focus on the special needs and dynamics of small businesses and small public companies (see September 13, 2011 formation announcement here). These Committee members are aware of the particular issues that these companies face in the capital raising, corporate governance and securities regulation arenas, and they make the SEC aware of issues and problems in the small company space. You can review information on current Committee members here.

The SEC is not bound by the recommendations of the Committee, but I believe that these recommendations will be taken seriously by the SEC and that some positive action could result. The SEC’s strong support here would substantially increase the chance of this new securities exchange being formed. I was not able to find any indication from the SEC on its possible reaction to the Committee’s recommendation.

The Committee has been reviewing this proposed new securities exchange and its possible positive effects on small cap and micro cap companies. In an interview on The Wall Street Journal’s MarketWatch site, Ms. Jacobs said that the Committee’s recommendations are based on prior comments made by Committee members in recent meetings.

The Committee is scheduled to meet on February 1 to discuss the recommendations that it may give to the SEC regarding this new exchange. The Notice for this Committee meeting can be found here, and the SEC will webcast the meeting. Based on Ms. Jacobs’ remarks, it appears that the Committee will advise the SEC to support the formation of this new exchange. This recommendation will likely include setting up this new exchange and potentially expanding exemptions from certain disclosure requirements for more small public companies. The overall thrust of these recommendations is to help these companies reduce costs and improve liquidity. This improved liquidity should facilitate the capital raising process for these companies and help them to expand and grow.

A meeting is also scheduled on February 5 to discuss the possible increase of the spread between the bid price and the offering price of a security. This spread, which is currently one penny for most stocks, is called a “tick”. The tick is the minimum price difference at which securities can be traded. In the MarketWatch interview Jacobs says that a wider tick would help to stimulate trading in the securities of illiquid small public companies by providing incentives to investment banks to increase trading in these securities.

In the MarketWatch interview Ms. Jacobs strongly supports the formation of this new exchange and the policy of helping these smaller companies improve their liquidity positions. She favors the creation of a system that specifically reflects the needs of these companies rather than forcing companies of all sizes to work within the same system.

I believe that the positions stated by Ms. Jacobs and the Committee are potentially very beneficial to small cap and micro cap companies, and I hope that the Committee follows through with a strong recommendation to the SEC regarding these positions. These items, along with some of the components of the JOBS Act (see Gunster’s Emerging Growth Companies Task Force page for details), should provide significant assistance to many small cap and micro cap companies. This assistance is sorely needed right now as many of these small companies are experiencing substantial problems as they attempt to emerge from the recent recession and start to grow again. Many of these companies have encountered poor operating results due to the recession, and now face illiquidity problems and difficulty in raising capital just when they really need it. The formation of this exchange, along with the other positive items that I mention above, could provide a badly needed stimulus to many small cap and micro cap companies and provide significant opportunities for these companies to begin to grow and prosper again.