Small Companies Are Being Excluded From IPOs, And The Market Is Looking For Solutions

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The IPO market is at a bit of a crossroads.

On one hand, a record 16 unicorns—companies privately valued at over $1 billion—have IPO’d in 2019, a major reason why U.S. IPOs are on pace for their fourth straight year of growth in terms of capital raised.

But beyond the largest, mostly unprofitable public offerings, problems appear to be lurking below the surface. The number of IPOs (and in turn, public companies) has fallen precipitously since the late-1990’s, as the cost and complexity of the traditional IPO process has increased. Some industry experts are concerned that this is disproportionately affecting small companies who are being deprived of the capital they need to grow.

Greater Costs, Fewer Companies

According to Bea Ordonez, Chief Financial Officer at OTC Markets Group, the number of registered offerings conducted by companies with under $100 million in annual revenue has fallen by as much as 75% since their highs in the 1990s.

“There is a great deal of attention focused on the decline in the number of public companies in the U.S. and on whether this is an issue of public concern or one that regulators should address in some way,” she said.

Though she believes in the value of public markets, Ordonez said it makes sense that fewer small companies are raising capital via the traditional IPO process.

“Why are IPOs and the number of public companies in long-term decline? In the traditional sense of a national exchange listing, we’ve made being a public company very difficult and very expensive for small and venture stage companies. Increasingly, it just doesn’t make sense for smaller companies to spend $3-4 million in upfront fees, and as much as $2 million dollars on a recurring basis in order to be listed on an exchange,” she said. “Our exchanges are a critical part of the financial ecosystem, but they increasingly serve the interests of the really big companies, and much less so the interest of smaller companies.”

Alternatives to the traditional IPO

But it’s not as if there aren’t alternatives. According to the SEC, companies are raising significant amounts of capital via exempt offering types, such as private offerings (Reg D) and online offerings introduced by the Jumpstart Our Business Startups Act of 2012 (Reg A and Crowdfunding).

The SEC estimates that in 2018 companies raised $2.9 trillion of capital via these kinds of exempt offerings, $1.5 trillion of which came via private offerings. Traditional registered offerings (IPOs), on the other hand, raised $1.4 trillion.

It is against this backdrop that the SEC announced in June that it was seeking public comment “on ways to simplify, harmonize, and improve the exempt offering framework.” In other words, the SEC is looking for ways in which our existing framework of exempt offerings can be made to work better for companies, and in particular for smaller companies, as well as for retail and other investors.

OTC Markets Group, home to over 10,000 securities, recognizes the challenges faced by small and venture stage companies. The company recently announced a strategic alliance with North Capital Investment Technology Inc that will provide companies trading on the OTCQX and OTCQB markets with access to a technology platform that enables them to cost-effectively raise capital online.

This technology offering provides a streamlined solution that allows companies to raise capital via a variety of online and other offerings in a compliant and cost-effective way.
“We were really excited to announce our strategic alliance with North Capital, which delivers a cost-effective technology solution for issuers to raise the capital they need to grow their businesses," said Ordonez

“In a nutshell, we see a problem, and we’re trying to solve for it,” she said. “Small issuers need capital to grow their business and drive growth. That’s what everyone says they want. The modern IPO process just isn’t well-suited to these types of companies. We think we can help provide an alternative that works.”

Photo by Roberto Júnior on Unsplash

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.