Could Liquidity Finally Return to MicroCaps?

Ian Cassel Blog, Question & Answer 7 Comments

The pendulum has been swinging in the same direction for over a decade as it relates to more regulation and more expense for microcap companies.  As fewer brokers allow investors to buy “penny stocks”, and even fewer of those even let you deposit a certificate, investors interest in investing in microcaps (open market and/or direct investments) has dried up over the years.  I joke about it with other investors all the time, “It’s almost like there are only five of us in the market just buying and selling to each other”.

The non-listed (non listed = doesn’t trade on the NASDAQ or NYSE) microcap market place has always been a duopoly between The Pink Sheets and the FINRA OTC Bulletin Board.  In September 2009, FINRA announced its intention to sell certain internet properties (ie: OTC Bulletin Board).  During 2010 and the first half of 2011, many broker dealers in OTC equity securities ceased the publication of priced quotations on the FINRA OTC Bulletin Board.  This can be seen in the following total share volume chart for the OTC Bulletin Board:

Click to Enlarge

The Pink Sheet market place (now the OTC Markets Group) was there to scoop up all this business and now 75% of unlisted nano-caps trade on the OTC Markets Group exchanges.  Today, close to 900 million shares trade per day on the OTC Bulletin Board versus 3 billion shares per day on OTC Markets.

Twenty years ago, the vast majority of IPOs were small ones, i.e, those that raised less than $50 million in gross proceeds. From a peak of more than 80% back in 1991, the percentage of IPOs raising less than $50 million has declined steadily and completely inverted to a level below 20% today. Even after adjusting for inflation, there is no way to describe the situation other than as a vanishing of the sub-$50 million IPO. (Source: Keating Capital)

The Pendulum Finally Moving Back?

In 2011, the SEC approved the creation of the “BX Venture Market”, a listing market for OTC equities that would be operated by the NASDAQ.  This market is expected to compete head to head with OTC Bulletin Board and OTC Markets but will likely have much stricter compliance/corporate governance guidelines.  This Baby NASDAQ as I call it will supposedly lower the listing requirements from $4 share to $1 share.  The BX Venture Market is expected to launch during 2012.  I for one view this as a very good thing as it will bring a higher visibility to microcaps and will likely help to reduce the restrictions by many brokerages on purchasing microcaps.

On April 5, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The intended goal of the JOBS Act is to promote job growth by easing the capital raising process for small and mid-sized companies. Many of the reforms included in this bill aim to reduce the regulatory burdens and cost of raising capital associated with previous public and private offering rules.  The JOBS act is one of the most significant regulatory changes in recent history.

Many opinion leaders view the JOBS act in different ways.  Here is a list of white papers written on the impact of the JOBS act.

The MicroCapClub (mc2) is an exclusive micro cap forum focused on micro cap companies (sub $500m market cap). The MicroCapClub was created and founded by Ian Cassel as a way to share ideas and to learn from other seasoned like-minded micro cap investors. Our goal at MicroCapClub.com is quality membership and quality stock ideas.  If you are an experienced micro cap investor, feel free to Apply today.

About the Author

Ian Cassel

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Ian is a full-time microcap investor. He is the founder of MicroCapClub, CIO of Intelligent Fanatics Capital Management, and co-founder of IntelligentFanatics.com. Ian started investing as a teenager and learned from losing his money over and over again. Microcap companies are the smallest public companies that exist, representing 48% of all public companies in North America. Berkshire Hathaway, Wal-Mart, Amgen, Netflix, and many others started as small microcap companies. Ian’s belief is the key to outsized returns is finding great companies early because all great companies started as small companies.

Comments 7

  1. Good read Ian. I thought it was more fun when it was just 5 or 10 guys trading the same names…like an endless game of Monopoly.

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  2. I wish I had time to do a study that the lack of funding over the past number of years for micro caps has a direct impact on the real unemployment today above 10%. Granted many micro cap companies “stole” investor money but that is not the reason to throw all micro cap funding away altogether because they are the job creators.
    It is not funny that taxpayers support big banks like Chase with FDIC insurance and they can trade securities that employee 3 people yet “can” lose 2 BILLION. Why can’t they figure out how to approve 10,000 loans at 200k each support small business. With logic like that, will we ever get to full employment? Hopefully the “jobs act” will turn the tide.

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  4. Ian-
    Do you know when the BX venture Market opens it’s doors for new issuer listings?
    We need an exchange to cater to companies between OTC-BB and Nasdaq SC. Looks like this is going to be that bridge. I just have NOT heard any more news on this since 2011.

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      Tony: Thanks for the comment. I agree we haven’t seen the $1 listing requirement we had hoped for, but what we have seen in the last 6 months is the NASDAQ lower their initial listing requirement from a mandatory $4 per share to $3 and even $2 in some instances so this is good progress. Also, the JOBS Act is allowing private companies an easier public path via mini-IPO’s per se ($5m minimum) with direct listing on the NASDAQ. Again, steps in the right direction.

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