Job Growth Advocates Endorse the Call for a Pilot Trading Program for Small-Cap Public Companies in the Alternative Recommendation Presented to the SEC Investor Advisory Committee

Pilot Program to Determine the Impact on Small-Cap Trading Liquidity
Through Highly Targeted Effort

Offers Fair Process to Test Market Structure As Opposed to Do Nothing
Approach

WASHINGTON–(BUSINESS WIRE)–Jan. 22, 2014–
Equity Capital Formation (ECF) Task Force co-chairs, Scott Kupor,
Managing Partner at Andreessen Horowitz and Jeffrey M. Solomon, CEO of
Cowen and Company, announced today their endorsement of the Alternative
Recommendation
on market structure improvement recently presented to
the SEC Investor Advisory Committee (the “Committee”) in a letter sent
to Joseph Dear, Chairman of the Committee. The Alternative
Recommendation, which calls for a pilot trading program for small-cap
public companies, will be considered at the Committee’s meeting on
January 31, 2014.

The letter highlights the following key points:

  • Small-cap public companies have suffered from a lack of capital
    formation. This has inhibited job creation, innovation and investment
    opportunities stemming from startups and small companies.
  • The core problem in the capital formation issue is the lack of trading
    liquidity in many publicly-traded small-cap companies. Existing market
    structure rules have made it challenging for meaningful institutional
    investor ownership, the primary source of trading liquidity.
  • This problem adversely impacts individual investors as they comprise
    the vast majority of ownership in small-cap stocks. Studies have shown
    that stocks achieve greater valuations with the presence of
    institutional investment.
  • A pilot program, as outlined in the Alternative Recommendation
    presented to the Committee, provides for a realistic way to enable
    institutional investors to return to the small-cap market while
    balancing the needs of investor protection and promoting capital
    formation.
  • A pilot program offers a fair process to test a market structure that
    we believe will have a positive impact on the US economy, individual
    investors, institutional investors and small companies.

Mr. Kupor and Mr. Solomon commented, “The proposed Alternative
Recommendation for a pilot program for small-cap companies can have a
tremendously positive impact on the U.S. economy and deserves careful
consideration by the Committee and the SEC. The Alternative
Recommendation, in addition to the findings of the Equity Capital
Formation Task Force, highlights a pilot program that would be a
targeted effort for only 2% of the market. We would welcome the
opportunity to assist in the design of a pilot program and contribute to
a thoughtful approach that considers the needs of all market
participants, including the individual investor, and has the potential
to deliver the intended goals of capital formation and job creation.”

Full text of the letter to the Committee follows:

 
January 22, 2014
 
 
 
Chairman Joseph Dear
Investor Advisory Committee
United States Securities and Exchange Commission
100 F Street
Washington, DC 20549
 

Re:

   

Recommendations to the Investor Advisory Committee by its
Market Structure

Subcommittee regarding
Decimalization and Tick Size

Dear Chairman Dear:

The Market Structure Subcommittee (the “Subcommittee”) of the SEC’s
Investor Advisory Committee (the “Committee”) recently submitted draft
documents containing recommendations on Decimalization and Tick Size for
consideration at the Committee’s meeting on January 31, 2014. As
Co-Chairs of the Equity Capital Formation Task Force, we are pleased the
Committee is engaged in these important discussions. It is clear from
the recommendations posted to the SEC’s website that the Committee is
contemplating market structure improvements that attempt to balance the
needs of investor protection and promote capital formation for small
companies in order to foster improved private sector job growth in
America. In President Obama’s recent weekly address to the nation, he
said 2014 could be a breakthrough year for creating good paying jobs
lost to overseas competitors. A pilot program testing a market structure
for small-cap companies that fosters liquidity and capital formation
necessary to promote job growth is a strong start in this direction.

The purpose of this letter is to urge the Committee, and ultimately the
SEC Commissioners, to adopt the Subcommittee’s Alternative
Recommendation #1, which calls for a pilot program for small-cap public
companies to trade at wider spreads and limited increments. Alternative
Recommendation #1 offers a clear path to testing market structure in
support of small company capital formation and aligns with the interests
of individual investors, the largest owners of small-cap stocks. On the
other hand, the Subcommittee’s Recommendation #1, which essentially is a
do nothing approach, is simply not a viable alternative to solve the
Core Problem.

The Core Problem

It is well documented that a robust market for equity capital formation
benefits private sector job growth in America. Not only has there been a
substantial decline in small company IPOs over the past decade and a
half, but many small-cap public companies have also suffered from a lack
of capital formation which has inhibited job creation, innovation and
investment opportunities stemming from startups and small companies.

At the center of this small-cap capital formation issue is the lack
of trading liquidity
in many publicly-traded small-cap
companies. Under existing market structure rules, including penny
increments, the lack of trading liquidity in this segment of the market
has made it challenging for meaningful institutional investor ownership.
Without institutional investors, which are the primary source of trading
liquidity, capital formation for small-cap companies has declined to
levels well below historical levels. However, a pilot program, such as
outlined in Alternative Recommendation #1, is designed to
realistically enable institutional investors to return to the small-cap
market. While the size of this market segment is small (companies under
$750 million in market capitalization represent only 2% of US total
equity trading volume), this segment is a critical component of the US
economic ecosystem, an engine for company and job creation. Fixing the
core illiquidity problem could have an enormous impact. To be clear, a
pilot program does not affect the remaining 98% of the market
and, therefore, leaves intact the benefits that investors have enjoyed
since the advent of decimalization.

Illiquidity Impacts the Entire Ecosystem

This is not just a problem that affects small companies and
institutional investors. Very importantly, illiquidity also adversely
impacts individual investors
in a very real way since they comprise the vast majority of ownership in
small-cap stocks. Studies have shown that stocks achieve greater
valuations with the presence of institutional investment. Improving the
liquidity in small-cap companies through revised market structure rules
will benefit small-cap companies by giving them a greater ability to
raise capital to grow their businesses. Moreover, and very importantly,
it will also provide individual
investors in those companies a way to benefit from long-term price
appreciation that comes with renewed institutional investor
participation. In short, Alternative Recommendation #1 rightly
suggests that a pilot program will demonstrate that individual investors
will benefit from long-term price appreciation as well.

A Pilot Program Is a Fair and Targeted Solution

A pilot program offers a fair process to test a market structure that we
believe will have a positive impact on the US economy, individual
investors, institutional investors and small companies. Alternative
Recommendation #1 provides several suggested guidelines to ensure clear
measurements of success or failure in a pilot implementation. This
includes the suggestion that the pilot programs be operational for a
sufficient length of time to truly validate their long-term success or
failure. The suggested guidelines are consistent with the views
presented to the US Treasury in a November 2013 report, “From
the On-Ramp to the Freeway: Refueling Job Creation and Growth by
Reconnecting Investors with Small-Cap Companies”
by the Equity
Capital Formation (ECF) Task Force
. The ECF Task Force is a group
comprised of professionals from across America’s startup and small-cap
company ecosystem.

Equity markets are dynamic and complex. Changes to market practices
should be considered carefully. A pilot program aimed at small-cap
companies would be a highly targeted effort affecting only 2% of the
market. If we can solve the small company capital formation problem, as
opposed to doing nothing, we will have found a path to creating jobs,
driving innovation and providing more positive investment opportunities
for both individual and institutional investors.

We urge the Committee and the SEC to adopt the Subcommittee’s Alternative
Recommendation #1.

Respectfully submitted,

   
Scott Kupor Jeffrey M. Solomon
Managing Partner, Andreessen Horowitz Chief Executive Officer, Cowen and Company
Co-Chair, ECF Task Force Co-Chair, ECF Task Force
 
   
cc: Honorable Mary Jo White, Chair
Honorable Luis A, Aguilar, Commissioner
Honorable Daniel M. Gallagher, Commissioner
Honorable Kara M. Stein, Commissioner
Honorable Michael S. Piwowar, Commissioner
Lona Nallengara, Chief of Staff
John Ramsay, Acting Director of SEC’s Division of Trading and Markets
 

About the ECF Task Force

Comprising professionals from across America’s startup and
small-capitalization company ecosystems, the Equity Capital Formation
(ECF) Task Force
formed in June 2013 to 1) examine the challenges that
America’s startups and small-cap companies face in raising equity in the
current public market environment, and 2) develop recommendations for
policy-makers that will help such companies gain greater access to the
capital they need to grow their businesses and generate private sector
job growth. The task force’s efforts have been informed by discussions
flowing from The Securities and Exchange Commission’s Decimalization
Roundtable (February 2013), which examined the impacts of decimalized
pricing of securities on IPOs, trading, and liquidity for small and
middle capitalization companies; and from the Capital Access Innovation
Summit convened by the Treasury Department and the Small Business
Administration
in June 2013, which focused on the impact of the JOBS Act
of 2012 on capital formation for emerging growth companies and what
additional measures might benefit this process.

In a November 2013 report presented to the U.S. Department of the
Treasury
titled, “From
the On-Ramp to the Freeway:
Refueling
Job Creation and Growth by Reconnecting Investors with Small-Cap
Companies,”
the ECF Task Force made a series of recommendations to
enhance market structure for small-cap companies as a means to increase
the potential for job creation and growth. A copy of the complete report
can be accessed at: http://www.equitycapitalformationtaskforce.com.

Source: Cowen Group, Inc.

Media:
Sard Verbinnen & Co
Dan Gagnier/Carissa Felger
212-687-8080
/ 312-895-4701

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