The Equity Capital Formation (ECF) Task Force, a group comprised of individuals from across the country’s startup and small-capitalization company ecosystems, today presented a comprehensive report to the U.S. Department of the Treasury containing a series of recommendations to enhance market structure for small-cap companies as a means to increase the potential for job creation and growth. A copy of the complete report can be accessed at: http://www.equitycapitalformationtaskforce.com. In the report, titled “From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies,” the ECF Task Force highlights that the significant decline in the number of small-cap IPOs has stifled both U.S. job growth and fundamental research and development in breakthrough technologies. Economic and regulatory changes to the capital markets have made it difficult and cost-prohibitive for small-cap companies to go public and raise the growth capital they need to increase their employee base and continue to invest in R&D. The success of the JOBS Act as a balanced, thoughtful piece of legislation that promotes equity capital formation enables market participants and policy-makers to now address some of the remaining barriers in accessing growth capital faced not only by small private companies but also by many small-cap companies that are already public. Jeffrey Solomon, Co-Chair of the ECF Task Force and Chief Executive Officer of Cowen and Company said, “We currently have a one-size fits all capital markets ecosystem that makes capital formation for small-cap companies very difficult. Today’s small-cap stocks have low trading liquidity, little institutional ownership and support and, as a result, it is difficult for these companies to raise the capital they need to hire employees, increase their product research and development, and ultimately grow their share prices. In addition, we are also calling for the implementation of the Reg A+ rules in Title IV of the JOBS Act.”
Scott Kupor, Co-Chair of the ECF Task Force and Managing Partner, Andreessen Horowitz added, “The good news is that there is a relatively simple fix to the market structure challenges that doesn’t impact the 98% of the stock market that trades in larger-cap stocks. The ECF Task Force’s recommendation to increase tick sizes from 1 cent to 5 cents and limit the trading increments is a surgical fix to the small-cap market that will bring much needed liquidity back into these stocks.”The ECF Task Force has outlined specific recommendations which can be implemented immediately to fuel the growth of capital formation and the U.S. economy. Key Recommendations: Expand access to capital for small startups and micro-cap companies by completing the JOBS Act’s mandates regarding Regulation A and resolving conflicts with state laws. Currently small startup and micro-cap companies can only issue up to $5 million in securities in order to qualify as emerging growth companies under the JOBS Act. The ECF Task Force recommends promulgation of rules to implement the recent change enacted by the JOBS Act to allow companies to issue up to $50 million in securities, so that Regulation A+ becomes a viable option for small startup and micro-cap capital formation. In addition, the ECF Task Force also recommends making it clear that transactions under Reg A+ preempt state security law requirements. Encourage increased liquidity in small-cap stocks by fostering a simpler, more orderly market structure for trading small-cap companies. The ECF Task Force recommends conducting a pilot trading program, overseen by the SEC, where select small-cap companies trade under new Small-Cap Trading Rules (STaR), effective immediately. Under STaR, participating companies will have market capitalizations below $750 million, and should be quoted in minimum price increments of $0.05 and trade only at the bid, the offer or the mid-point between the two.
To determine the effectiveness of the trial program, the ECF Task Force recommends implementing a clear methodology for collecting and analyzing data to determine the effects of the program on small-cap trading. Metrics including relative level of trading liquidity, changes to institutional ownership and the rate of equity issuance should be considered for the pilot program. The pilot program should run long enough to provide a true empirical test of STaR’s effect on the small-cap market. The ECF Task Force also recommends that the SEC uses the empirical data generated by the pilot program to evaluate whether Small-Cap Trading Rules should apply to small-cap trading on a permanent basis.About the ECF Task Force Comprising professionals from across America’s startup and small-capitalization company ecosystems, the Equity Capital Formation (ECF) Task Force formed in June 2013 to 1) examine the challenges that America’s startups and small-cap companies face in raising equity in the current public market environment, and 2) develop recommendations for policy-makers that will help such companies gain greater access to the capital they need to grow their businesses and generate private sector job growth. The task force’s efforts have been informed by discussions flowing from The Securities and Exchange Commission’s Decimalization Roundtable (February 2013), which examined the impacts of decimalized pricing of securities on IPOs, trading, and liquidity for small and middle capitalization companies; and from the Capital Access Innovation Summit convened by the Treasury Department and the Small Business Administration in June 2013, which focused on the impact of the JOBS Act of 2012 on capital formation for emerging growth companies and what additional measures might benefit this process.