JOBS Act Impact

Matthew Scogin is SVP and Chief of Staff to the CEO at NYSE Euronext. Prior to joining NYSE Euronext in 2009, Matthew held positions at Wachovia Bank and the U.S. Treasury Department.

Small businesses are the backbone of the U.S. economy. Consider these facts from the Small Business Administration: Small companies represent 99.7 percent of all employer firms in the United States; small businesses employ 57 percent of the nation’s private workforce; and small businesses create 13 times more patents per employee than larger firms. Those were some of the points Duncan Niederauer, CEO of NYSE Euronext, highlighted on May 1 when speaking to the SEC’s Advisory Committee on Small and Emerging Companies (click here to see his presentation).

It is hard to over-emphasize the critical role small companies play in driving economic growth, job creation and innovation in the U.S. Unfortunately, many entrepreneurs with the ability to turn innovative ideas into job-creating businesses do not have adequate access to capital. There are over 5.7 million businesses with less than 500 employees in the U.S., and according to a survey by the National Small Business Association, 43% of them have been unable to find sources of capital over the last four years. As Duncan said on May 1, most of these are “mom & pop” businesses that need access to affordable capital, but not necessarily capital markets. For these companies, we should focus on creating a more robust microfinance industry and recalibrating our community banking system.

For other small companies, access to capital markets provides a powerful engine of growth. In fact, the National Venture Capital Association says 92% of job growth occurs after a company goes public. As you can see in Duncan’s presentation, the good news is that the U.S. IPO market has re-opened after a steep decline during the financial crisis. However, smaller company IPOs have waned. There are a number of factors explaining why small companies are struggling to raise public capital, including a significant increase in the cost and regulatory burden of going public in the last decade, which has had a disproportionate impact on smaller companies.

We believe the JOBS Act is helping by providing an “on-ramp” to public markets for smaller companies. Although the Act is only a year old and major sections of it have yet to be implemented, early results show it is having an impact. More than 500 companies have elected “emerging growth status” under the Act (89% of those are U.S. domiciled companies) and 77% of companies that have gone public since the Act passed have registered as emerging growth companies. As we suspected, the confidential filing submission has proven particularly popular - almost two-thirds of emerging growth companies have taken advantage of the provision that allows them to submit at least one confidential draft registration statement prior to their public filing.

So while the JOBS Act is helping ease the cost and burden of going public, more needs to be done to enhance the ecosystem supporting small company stocks. Once tradeable, too many small/microcap stocks face a lack of liquidity and limited analyst coverage. Almost 2,000 stocks have less than $1 million in daily volume traded, compared to more than $500 million for S&P 100 stocks. Moreover, companies with a market cap under $300 million have an average of only 1.4 analysts covering their stock – which is down from 2.6 analysts in 2007.

Duncan focused most of his recommendations on steps that could be taken to improve capital markets for small companies. One such idea is tick size reform. Narrower spreads are generally positive for investors, especially in more liquid stocks, but a $0.01 minimum tick size for illiquid stocks may create a disincentive to provide liquidity. Widening the tick size for smaller company stocks may serve as an enticement for trading and providing liquidity in small cap stocks, subsequently improving capital raising for these companies.

To conclude his presentation, Duncan emphasized the need to strengthen U.S. public markets and the price discovery process. Off-exchange dark trading is at record levels, deteriorating market quality for all issuing companies but especially for less liquid stocks. Small / micro cap companies tend to have a higher percentage of volume traded away from an exchange. NYSE MKT, our platform for small cap companies, lists 442 securities - and over 40% of the volume in NYSE MKT stocks trades off-exchange. While holistic market structure reform may also be warranted, we believe there is a clear regulatory fix to this growing problem: Require off-exchange venues to offer a minimum level of price improvement before a trade can be executed. Places like Canada and Australia have implemented similar rules and have seen a meaningful improvement in market quality.

U.S. markets are the most robust and liquid in the world – and are once again the global leader in capital raising. As Duncan said recently, we should concentrate on strengthening the public market rather than pushing more securities to private, less transparent and less regulated venues. This will help ensure that entrepreneurs and small businesses have access to the capital they need to expand and thrive.