By Amanda Maine, J.D.
Members of the SEC’s Small Business Capital Formation Advisory Committee have heard from representatives of smaller companies on a number of topics, including private offering exemptions, the definition of accredited investor, funding gaps that impede entrepreneurs, issues related to the COVID-19 pandemic, and challenges minority communities face accessing capital. At its most recent meeting, the committee heard from representatives of national exchanges who discussed how their organizations seek to include smaller companies and the challenges they face.
LTSE: Focus on long-term over short-term. Martin Alvarez, chief commercial officer of the Long Term Stock Exchange (LTSE), focused on LTSE’s emphasis on the long-term. LTSE was approved as a national stock exchange in May 2019 and was officially launched in September 2019. According to Alvarez, LTSE aims to address "chronic short-termism" in the stock market and spearheading innovation to further this goal. According to Alvarez, other exchanges encourage companies to sacrifice long-term value for short-term expectations, or they simply decide to opt out of the public market entirely. He also decried the rise of private market capital raising as bringing greater inefficiencies and opacities.
LTSE is designed to offer a listing option for both large and small companies, Alvarez said. LTSE eschews a one-size-fits-all perspective approach and instead embraces five main principles companies can mold to their own vision. As implied by its name, the principles emphasize serving the interests of a broad group of stakeholders, measuring success over long time horizons, rather than short-term gains. Company compensation plans for officers and executives should reward long-term performance and they should prioritize engagement with long-term shareholders.
Over-the-counter: Where small companies can thrive. Cass Sanford, associate general counsel of OTC Markets Group, touted the OTC market as a place where smaller companies can thrive and "graduate" to an exchange listing. While the OTC market trades thousands of securities, from large international companies to small domestic companies, Sanford said that smaller companies use the OTC market as a venture market. Its disclosure rules are streamlined towards the type of business involved, and compliance costs are lower than the big national exchanges, she said. According to Sanford, between 60 to 80 companies "graduate" from the OTC exchange to an exchange listing every year.
Sanford outlined the three market tiers on the OTC Markets Group: OTCQX, OTCQB, and Pink. Sanford said that OTCQX and OTCQB have securities of over 1,400 trading, a "good chunk" of which are small public companies based in the U.S. She also noted that these two exchanges represent a variety of different industries, from financial services to technology to health to industrial manufacturing. Small U.S. public companies on OTCQX and OTCQB markets have an average $48 million market cap, with $65 million in revenue and 197 employees, she remarked.
Nasdaq and NYSE. Representatives from Nasdaq and NYSE told the committee that while the financial press has been focused on the impressive number of special purpose acquisition company (SPAC) IPOs, the big exchanges still have room for smaller companies, and healthcare and biotechnology companies in particular. Caroyln Saacke, chief operating officer of NYSE Capital Markets, said, that excluding SPACs, there have 175 IPOs with a market cap of $250 million or less since 2016, most of which were in the healthcare sector.
Saacke also said that investing in smaller companies wishing to go public is sometimes perceived as speculative because there are fewer financial controls and less experienced management. She said that NYSE provides many services to newly public companies, including up to four years of investor relations services (which, in addition to jumpstarting the "public company life" also improves investor relations), investor access services, educational forums, and relief programs.
NYSE senior vice president Jeff Thomas offered his own thoughts about how to encourage smaller companies to list on exchanges. The cost of director and officer (D&O) insurance can be a hindrance for smaller businesses, he said. There is also a push for more disclosure on environmental, social, and governance (ESG) factors, and companies are asking for more guidance on this topic, Thomas advised. One aspect of ESG is board recruitment for companies that wish to have a more diverse board of directors, he added, which can be difficult with smaller companies. Thomas also praised the SEC’s recent proxy reform efforts, including requiring more transparency for proxy advisory firms and changes to the shareholder proposal process, as a way to encourage more small companies to go public.