In a recently published paper written by Marshall Lux and Jack Pear, titled “Hunting High and Low: The Decline of the Small IPO and What to Do About It,” the authors observe that initial public offerings undertaken by smaller companies (those below $100 million) have declined disproportionately compared to those of larger companies. Similarly, while there has been an overall decline in the number of U.S. public companies, the decline of smaller public companies has been more significant.
According to the article, in the 1990s, small IPOs comprised 27% of all capital raised in public markets, while since 2000 they have represented only 7% of all capital raised. Based on a survey of literature, the authors identify five related principal causes for the decline, including analyst coverage trends, buy-side trends, a shift from active to passive investment strategies, the growth in private capital, and increasingly burdensome regulation. The authors have a number of recommendations, including the following: amending the definition of smaller reporting company (SRC), which already was proposed by the Securities and Exchange Commission; extending the emerging growth company on-ramp to ten years from five years; increasing the shareholdings required to bring a shareholder proposal; allowing companies to include mandatory arbitration provisions for shareholder-issuer disputes; and simplifying the disclosure framework. While it is clear how an extension of the on-ramp provisions and amendments to the SRC definition relate to, or would affect, smaller IPOs, the paper does not explain the rationale for the shareholder proposal or the mandatory arbitration provision changes and the nexus to reinvigorating smaller public offerings.
It would have been interesting to have seen recommendations relating to research coverage, particularly since the authors identify changes in research coverage trends as a root cause of the decline of smaller public offerings.