Feb. 1 (Bloomberg) -- The U.S. Securities and Exchange Commission should urge the creation of a new stock exchange limited to small companies that have trouble raising capital in public markets, an agency panel recommended today.
The SEC Advisory Group on Small and Emerging Companies made the recommendation as its co-chairman suggested that a 2012 law intended to increase the number of initial public offerings might fail to have a big impact. That so-called Jumpstart Our Business Startups Act was designed to induce more IPOs by reducing disclosure requirements and restrictions on how firms can advertise for investors.
“The JOBS Act, at least in my view, definitely did not do enough,” said Stephen M. Graham, the advisory group’s co-chairman and a partner who has represented emerging companies at Fenwick & West LLP in Seattle. “The main reason why companies don’t want to go public is liquidity in the stock,” as well as disclosure requirements.
The advisory group said the exchange should be open only to sophisticated investors, which it did not define, because financial disclosure of the listed companies would be limited. The panel said the companies would still be subject to a regulatory regime “strict enough to protect investors but flexible enough to accommodate innovation and growth,” according to its draft recommendation.
For firms that don’t want to go public, the SEC should encourage platforms that make it easier for shares to be traded on a secondary market such as New York-based SecondMarket Inc., Graham said.
The SEC isn’t required to hew to the advisory group’s recommendations. Still, some of the committee’s past suggestions were included in the JOBS Act legislation.
“I think the small exchange is the best” recommendation, SEC Commissioner Daniel M. Gallagher told reporters after listening to the panel’s debate. “Whether it should be limited to accredited investors, I am not sure about.”
The SEC’s definition of such investors includes banks or other financial firms, organizations with assets in excess $5 million and individuals with a net worth of more than $1 million.
The committee also recommended the SEC adopt rules aimed at improving the liquidity of smaller-company stocks. Specifically, it said the SEC should adopt rules to increase the minimum trading increment for smaller exchange-listed companies.
Stocks are currently traded in minimum increments of one penny. Until 2001, shares were priced in minimum increments of one-sixteenth of a dollar before technology allowed traders and electronic exchanges to usher in “decimalization,” or penny pricing.
While decimalization reduced the cost to buy or sell shares, it also narrowed spreads for investment banks and other trading firms and reduced their incentive for making a market for a low-priced stock.
The committee said larger “tick sizes” would restore that incentive, thereby improving liquidity for such shares. The panel didn’t specify how much tick sizes should increase and said the listed companies should have a say in the minimum amount.
A roundtable of regulators and market participants is scheduled on Feb. 5 to discuss changes to tick sizes. The SEC-sponsored gathering will include representatives of mutual funds, electronic trading firms and venture capitalists.
In a study issued in July, the SEC staff declined to recommend an increase in the minimum tick size. The study, which was a review of academic literature, decided it was uncertain whether an increase would improve the number of initial public offerings.
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