According to Adduci, the outlook for smaller IPOs looks challenging. "Unfortunately, there have been several structural changes in the public equity markets that are making them unreceptive to smaller public companies," he says.
The first of these is the growing dominance of institutional investors in the marketplace--the mutual funds, pension funds and hedge funds through which individuals now routinely invest. "When a portfolio manager has $1 billion to invest," Adduci says, "it's no longer feasible for him or her to make investments in small companies whose total market value may be only $25 million."
The problem, Adduci says, is that the portfolio managers would have to buy the entire company--which of course they don't want to do--for it to make any impact on their portfolios. "The institutionalization of the market has taken many individual investors out of the market altogether," says Adduci, "leaving far fewer buyers of smaller initial public offerings."
Adduci says what's exacerbating this problem is that the Nasdaq stock markets--specifically the SmallCap market and the National Market System--appear to be accommodating this trend with new regulations, the most visible of which are tough new listing standards. "The new listing requirements which took effect in February substantially raised the bar on the share price, size, required equity and number of shareholders that companies must have before they can trade on that stock market," Adduci says.
The net effect of these new listing standards was that Nasdaq sought to de-list some 309 companies from the SmallCap market and 443 companies from the National Market System that didn't meet the new requirements. "To put the numbers into perspective," says Adduci, "the 309 companies that were told they would have to trade elsewhere represented 24 percent of all the stocks traded on the SmallCap market."
Changes like these mean IPOs for small businesses are getting more difficult to negotiate. To alleviate the problem, Adduci has proposed the formation of a stock market to accommodate emerging growth companies. "Clearly, there's a need for a marketplace where emerging growth companies can access growth capital," says Adduci, "and where investors are protected."