Functional Inspiration Blog; Money and Innovation in the Microsphere by Josh Levine, IP-Oh!–Shifting Tide of Public Offerings

Functional Inspiration Blog; Money and Innovation in the Microsphere by Josh Levine, IP-Oh!–Shifting Tide of Public Offerings


IP-Oh!–Shifting Tide of Public Offerings
By Josh Levine -- December 10, 2010
http://levinesmicrocapinvestor.com



The US IPO market of today bears only a faint resemblance to the roaring 90s, which culminated in the dot-com craze and bursting of the tech bubble in 2000. In recent years the biggest splashes in IPOs were made by such familiar names as Visa (V) and General Motors (GM).

In fact the party moved off-shore this past decade to Asia, where Chinese stock exchanges, including Hong Kong , have raised almost triple the amount of money secured by IPOs across the US in 2010.

Hong Kong reigns as the center for new listings, raising $53 billion in IPOs this year, compared with $42 billion in the US. Mainland exchanges raised $67 billion, according to Dealogic.

Still, the US IPO market should not be written off too quickly. In a Barron's piece this week, Renaissance Capital's chief investment officer points out that this calendar year's releases were up 21% through the end of November.

Renaissance's own float-weighted index tracks new issues for two years following their debut. The index had risen 15.9%, versus 12.1% for the S&P 500—excluding first-day gains.

This year's IPO market is expected to end on a strong note as eight more deals are scheduled for launch this week. If all eight companies manage to successfully go public, the IPO count for the month of December will hit 19 (compared with eight for December 2009) and 153 for the year (compared with 63 in 2009).

Comeback for Microcap IPOs?

Following the dot-com implosion, the US IPO market became quickly dominated by big-bucks institutional players and small companies were forced to go public mostly via reverse mergers—a far less prestigious avenue. The traditional IPO route has been closed off to nearly all microcap-sized companies.

Now a US House of Representatives panel is considering easing rules on small company IPOs, which would enable smaller companies to go public with fewer costs.

Federal law allows companies to conduct securities offerings of $5 million or less without filing a full registration statement with the SEC. The proposal, which hasn't been introduced yet as legislation, would raise the dollar limit under the exemption, known as 'Reg A', to $30 million.

The venture capital industry rightly argues the current exemption isn't useful to small companies because the current dollar limit is too low to justify the costs of going public. Naturally, VCs wants to see the change because venture capital funds are dying for liquidity. There are only so many opportunities to sell a venture-level company to a larger suitor; a pick-up in small IPOs would provide VCs additional ways to cash out.

Importantly, by raising the cap to $30 million, it would entice small private firms to seriously consider a 'Reg A' IPO as an alternative to a reverse merger or some form of venture funding. It will also spur new interest in the microsphere and act as a much-needed catalyst for investments in innovation and job creation.

I'll be watching develops closely next year when Congress may weigh this legislation, which will give a shot to the microcap segment if it makes it through the sausage machine.