What’s Killing Small Cap IPOs?


The Wall Street Journalrecently published an article proclaiming that “Small IPOs Are Dying – That’s Good”. The Journal article noted that Venture Capital financing has become the preferred method of financing in recent years, and that the number of small cap public companies has declined precipitously since the 1980s, when roughly sixty percent of all publicly traded companies were small caps. Today, that number is roughly twenty percent.

Scott Kupor, managing partner of Andreesen Horwitz, a leading venture capital fund  echoed that sentiment. Kupor claims that small cap companies have been discouraged by compliance costs created by the 2002 Sarbanes-Oxley Act.  “Companies therefore wait to go public, the argument goes, until they are much larger so that they can amortize these costs over a much higher base of earnings.”

As a result, there are more VC dollars chasing venture deals, but fewer deals are getting done. According to Pitchbook data, start-up VC financing reached a 10 year high in 2017, with $84 billion in funding – the bulk flowing into the tech sector.

The net result is that issuers are getting better terms from VCs, which makes the prospect of an IPO even less attractive. This is especially true considering Sarbanes-Oxley compliance can be extremely costly and time consuming. The human and financial resources simply required to maintain listing compliance can easily weigh down a small company, and detract from core business operations.

Recently, alternatives to venture capital and IPOs have emerged. Regulation A+ Offerings are a new way for a small companies to raise up to $50 million by selling securities to the general public (not just accredited investors). Regulatio A+ deals are not public listings so they allow the issuer to remain private. Consequently, the reporting requirements are greatly reduced, which is a tremendous advantage for issuers.

From the time Regulation A+ was enacted in June of 2015 through February of 2017, a total of 32 companies raised $396 million in financing.

In addition to Regulation A+ financings, some companies have resorted to a relatively new method of raising capital called an Initial Coin Offerings (ICO). An ICO occurs when a company issues a digital form of currency called a cryptocurrency or token in exchange for cash. If a company issues cryptocurrency, then typically that coin can be used as a form of payment and acts as a surrogate for a fiat currency like the U.S. dollar; if a company issues a token, that coin can be used to redeem the issuer’s goods or services.

In 2017, companies raised over $3.2 billion via ICO, the most notable of which, Filecoin raised over $257 million. The ICO market remains white-hot, as ICOs have raised over $6.3 billion in the first quarter of 2018 alone the largest of which, Telegram, raked in over $1.7 billion.

Clearly, management teams have a number of financing options available to them other than simply going public.  It appears for the time being as if the downward trend for IPOs is set to continue.

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