A recent journal article by Prof. Robert Bartlett, III, Prof. Paul Rose, and Prof. Steven Davidoff Solomon (What Happened in 1998? The Demise of the Small IPO and the Investing Preferences of Mutual Funds) suggests that the decline in smaller IPOs resulted in a shift in the investment preferences of mutual funds away from IPOs generally. Most studies have focused on increased regulatory burdens, market structure, changes, and research-related issues. However, the study notes that, in particular, mutual funds found the illiquidity associated with smaller IPOs risky. The study also notes a shift in the late 1990s in the investment banks participating in underwriting smaller IPOs, with most investment banks now concentrating on larger IPOs. This may itself have contributed to the illiquidity of smaller IPOs. The article may be accessed here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2718862.
The study presents an interesting explanation that is consistent with our experience. More important, assuming this reaction accounted for (and continues to account for) the diminished interest on the part of larger funds in smaller IPOs, it suggests that there would be limited interest among larger funds in the securities offered in a Regulation A offering (given the initial size) and that a venture exchange, which may appear to be a panacea, would have little impact on smaller offerings.