Job Growth Advocates Encouraged By Passage Of Legislation Calling For Pilot Trading Program For Small-Cap Companies

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.

Mr. Kupor and Mr. Solomon commented, “Congress’ passage of legislation on market structure reform for small-cap companies is an essential step towards fostering the liquidity and capital formation necessary to promote job growth. We thank Congressman Duffy and his colleagues for their efforts in this important area. We look forward to working with the SEC Commissioners and staff in the design of a pilot program.”

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.

In a November 2013 report presented to the U.S. Department of the Treasury titled, “ From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies,” the ECF Task Force made 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:

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