09.14.2018
By Rob Daly

OPINION: Whither Small-Cap Trading?

After the U.S. Securities and Exchange Commission called a halt to its tick-size pilot on September 10, Wall Street found itself left to wonder how to address the trading of small-cap stocks in an electronic environment.

Increasing the size of the tick increment during the time of the pilot resulted in nothing more than an estimated $350 million lesson for the industry in what not to do.

However, the issue may become moot as the number of publicly traded small-cap stocks could shrink significantly in the years to come.

The overall market for initial public offerings continues to decline from its peak of 486 in 1999 to 160 IPOs in 2017, although the past two years have seen an upswing in IPOs.

Some of this is due to underwriters spending too much time chasing and bringing unicorns public at the expense of smaller firms.

In turn, those firms have sought out alternative methods of raising capital, such as turning to venture capital and private equity firms.

The growing adoption of initial coin offerings likely only will hasten the flight from IPO for small and mid-cap firms.

The median price raised by IPO from 2012 to 2017 ranged between $95 million and $126 million, according to a study from Statista. At the same time, CoinDesk reported that the average ICO in 2017 netted less than $100 million.

For a small or a mid-sized company the results are on par, except that one model does not involve spending 10% of the raised capital on underwriter fees and expenses.

Even though the SEC has not provided guidance on the creation and trading of securities tokens, firms are moving ahead with ICOs while conforming to Regulation A, D, and S requirements.

Once the regulator eventually issues its guidance, the market should prepare for a land rush.

The trading infrastructure for securities tokens are getting in place and are just waiting for the SEC to flip the regulatory switch.

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