Equity Capital Formation (ECF) Task Force co-chairs, Scott Kupor, Managing Partner at Andreessen Horowitz, and Jeffrey M. Solomon, CEO of Cowen and Company, expressed encouragement after the U.S. House of Representatives passed the Small Cap Liquidity Act (H.R. 3448), sponsored by Congressman Sean Duffy (R-WI).
“Yesterday’s passage of the Small Cap Liquidity Act by the U.S. House of Representatives is evidence of growing support for meaningful market structure reform to help small-cap companies grow and thrive, as they are an important segment of our nation’s economy,” said Mr. Kupor and Mr. Solomon. As discussed in the report, “ From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies,” the ECF Task Force concluded that increasing tick sizes from 1 cent to 5 cents and limiting trading increments is a surgical fix to the market structure challenges facing the small-cap market.
Mr. Kupor and Mr. Solomon continued, “The findings of the ECF Task Force, combined with passage of legislation in the U.S. House of Representatives, provide the Securities and Exchange Commission with clear bipartisan signals of encouragement to design a meaningful pilot program for small-cap companies on market structure reform. We urge the Commission to consider a program, as suggested in the ECF Task Force’s report, which provides clear and effective guidelines for implementation and realistic measurements of success and failure while ensuring investor protection. A pilot trading program would allow a fair process to test market structure and would only include the small-cap market, which represents approximately 2% of total equity trading volume in the U.S.”
Key points from the ECF Task Force include:
- Small-cap public companies have suffered from a lack of capital formation. This has inhibited job creation, innovation and investment opportunities stemming from startups and small companies.
- The core problem in the capital formation issue is the lack of trading liquidity in many publicly-traded small-cap companies. Existing market structure rules have made it challenging for meaningful institutional investor ownership, the primary source of trading liquidity.
- This problem adversely impacts individual investors as they comprise the vast majority of ownership in small-cap stocks. Studies have shown that stocks achieve greater valuations with the presence of institutional investment.
- A pilot program, as outlined in the ECF Task Force report, will provide for a realistic way to enable capital to start flowing to the small-cap market while balancing the needs of investor protection and promoting capital formation.
- A viable pilot program offers a fair process to test a market structure will have a positive impact on the US economy, individual investors, institutional investors and small companies.