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What Ails the U.S. Public Markets and Entrepreneurship?

Written by: Ronald Woessner

Which road do we follow to fix them?

The US public markets are dying AND entrepreneurship in America is dying. The number of US public companies fell by 46% from 1996 to 2016, despite the US economy having grown by nearly 65 percent on an inflation adjusted basis during the same period. Similarly, entrepreneurship in America is dying. The number of US entrepreneurs dropped at an alarming pace from 2006 to 2017 according to the US Census Bureau, despite the subject now being taught in US colleges and universities.

Why are the US Public Markets and Entrepreneurship in America Dying?

The answer is simple. Many smaller cap companies delay going public or avoid going public because the US public markets are inhospitable to these companies. This public markets inhospitability to smaller companies manifests as follows:

  • Smaller cap stock valuations versus S&P 500 stocks have been crushed by market structure, e.g., vastly diminished spreads and tick sizes, and regulations, e.g., order handling rules, Reg. ATS, Sarbanes-Oxley.
  • Smaller-cap stocks are illiquid.
  • Institutional investors avoid investing in illiquid smaller cap stocks.
  • Smaller-cap companies have little-to-no investment analyst coverage.
  • Smaller-cap companies are starving for capital; the available capital is often “toxic.”
  • Gaps in SEC short-selling regulations enable short sellers unfairly to damage smaller-cap company valuations and the companies themselves.

Many of those that do go public encounter this market inhospitability and die or languish in business purgatory. The illiquidity that many stocks experience is but one manifestation of this inhospitability.

Because smaller cap companies delay going public or avoid going public, the number of US public companies fell by 46% from 1996 to 2016, despite the US economy having grown by nearly 65 percent on an inflation adjusted basis during the same period.

The decline in the number of US publicly listed companies (so-called “listing gap”) is virtually 100% explained by the disappearance of the smaller IPO (<$50 - $100M) beginning in 2000, i.e., smaller-cap companies began avoiding the public markets in droves since 1999.1

As smaller cap companies (a) delay going public, (b) avoid going public, or (c) go public to languish or die, the result has been that US entrepreneurship has withered alongside. The number of US entrepreneurs dropped at an alarming pace from 2006 to 2017 according to the US Census Bureau, despite entrepreneurship now being taught in US colleges and universities.2 That entrepreneurship in America is dying is not surprising: as smaller cap companies and startups continue to fail, fewer would-be entrepreneurs want to quit their jobs to become entrepreneurs. Fewer would-be innovators view the potential for the IPO at the end of the rainbow.

What is the Cure for the Ailing US Public Markets and US Enterpreneurship?

Again, the answer is simple. The cure to reverse the declining number of US public companies and to encourage entrepreneurship is to create a “venture exchange” with special trading rules that permit and encourage robust broker/dealer after-market incentives (trading spreads and trading commissions).

How do we know this is the cure? Because according to research by David Weild IV, former Vice-Chairman of NASDAQ and Father of Jobs Act 1.0, there is a strong correlation in developed countries between robust after-market incentives and smaller IPOs. See more in "IssuWorks: Hearing on Legislation to Further Reduce Impediments to Capital Formation," Statement of D. Weild, before the Financial Services Committee, October 23, 2013.

A venture exchange with properly structured trading rules will create the upward virtuous cycle described below:

  • With robust after-market incentives => broker dealers will be suitably incentivized to nurture and mentor smaller-cap companies (as they used to do).
  • With mentorship => more smaller-cap companies will thrive in the public markets.
  • As more smaller-cap companies thrive => smaller-cap IPOs will increase.
  • As smaller-cap IPOs increase => the number of public companies increases.
  • More thriving smaller-cap companies and more IPOs => encourages US entrepreneurship.

Congressman Tom Emmer (R-MN) has re-introduced, the “Main Street Growth Act” bill, H.R. 2899, which calls for just such a venture exchange to create these salutary benefits.

Further details and factual support for the assertions in this article can be found in my filed comments on Jan. 17, 2020, in response to an SEC Request for Comment regarding the plight of publicly listed companies with thinly traded stocks.

What’s at stake here is maintain the US as the #1 capital market in the world, increase opportunities and rewards for entrepreneurship, increase GDP and provide more jobs for all Americans, especially minorities.

Thank you for your attention to this matter of critical importance to America.

[1] See "Hunting High & Low: The Decline of the Small IPO and What to Do About It." Lux and Pead, April 2018 at p. 8.

[2] See my article “Entrepreneurship in the US is an Endangered Species,” previously published by Equities News.

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