We have seen various initiatives intended to promote capital formation for smaller reporting companies and emerging growth companies. Among these initiatives, the development of venture exchanges in the United States appears to be gaining momentum. The exchanges would, in comparison to their larger national exchange counterparts (Nasdaq Stock Exchange, New York Stock Exchange, etc.), allow smaller or earlier-stage companies to list their shares and provide for some liquidity.
Support for the formation of venture exchanges has come from representatives from NYSE MKT and Nasdaq OMX, who in May testified before Congress as to the need and proposed structure of a venture exchange. Additionally, a push for legislation promoting capital formation, supported by testimony from a group of industry professionals, has led to the introduction of the Main Street Growth Act, which sets rules and listing standards for a new venture exchange. In February, SEC Chair Mary Jo White expressed at the SEC Speaks conference that the SEC has been encouraging rule changing that would promote the establishment of venture exchanges, as the SEC has approved of these in the past.
While there has certainly been some progress and support, concerns have also been raised regarding the formation of a new venture exchange. Some have pointed out that the process for forming a new venture exchange will be slow, political and would be unlikely to result in the immediate change many seek. Others signal the ongoing concern regarding the lack of liquidity for shares of small and microcap companies. The American Stock Exchange’s Emerging Company Marketplace has been cited as an example of these concerns, having closed its doors only three years after opening. Outside the United States, London Stock Exchange’s AIM and Toronto Stock Exchange’s TSK Venture Exchange provide a similar platform for smaller companies, although both have struggled after the financial crisis. Currently, OTC Markets Group, an alternative trading system (ATS), recently tightened standards for listings, resulting in over 2,000 stock dropping to the lower listing level.
Despite these concerns, former CEO of the Philadelphia Stock Exchange, John Wallace, and other prominent industry leaders are reported to have begun plans to bring a venture exchange to Delaware. The plan reportedly would set up an ATS to trade U.S. and foreign securities and a venture exchange for smaller businesses to list their shares.
Perhaps in advance of moving forward with a venture exchange experiment, it would be helpful to analyze the extent to which the securities of micro-cap and small-cap companies listed on securities exchanges suffer from a lack of liquidity and the causes for the limited trading in the securities of these companies, as well as the impediments to capital-raising for smaller reporting companies that have the effect of limiting the float for these issuers.
Sources: The Deal Pipeline, Traders Magazine.