

The decline of the $10 million IPO, and why it matters - kevinburke
http://www.urgentspeed.com/applied_disruption/2010/04/why-ten-million-dollar-ipos-matter.html

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ctkrohn
This article is unpersuasive. Each of the supposedly anti-IPO changes had a
very good reason behind it. These should be seriously considered before
reverting to the old way of doing things:

#1: This is really a consequence of the other factors he cites.

#2: Decimalization made stock trading massively cheaper. When prices were
quoted in eighths, the price at which you could sell was 12.5 cents lower than
the price at which you could buy. This difference went straight into the
pockets of brokers, not investors. It was basically free money.

#3: Internet brokerages. What, you'd rather get on the phone and call someone
to make a trade? I love the convenience of E*TRADE and similar platforms.

#4: The growth of prop trading, in and of itself, didn't push out IPOs. It
merely filled the void in profits left when IPOs stopped making as much money
for the banks.

#5: Keep in mind how research used to be done: banks would effectively promise
to write good research on stocks they brought to market. I think it's absurd
and insulting to new companies to suggest that no one would buy their stocks
unless accompanied by heavily biased "research."

#6: Guess what, shareholders are the owners of the companies. They should have
a say in how companies are run. There's a balance between their interests and
management's interests, but the author merely asserts that things went to far
without providing evidence.

#7: While there's plenty of wealth outside the US, international investors are
still able to invest in the US. I don't see why this is a negative for IPOs.

#8: Larger funds: I'll admit that I'm unsure about this criticism. I don't
know enough about this area of the market.

#9: Keep in mind that Sarbox was passed to prevent Enron and Worldcom. Its
requirements may be onerous, but they're designed to help prevent specific
types of fraud that were extremely damaging to the economy. While Sarbox may
have reduced IPOs, it also may have reduced the risk of fraud. It's difficult
to say.

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hristov
This entire article is just a bunch of moaning and bitching about how things
are not like they used to be back in the olden times when stock brokers could
make easy money without being too smart or working too hard by just answering
the phone, executing orders and taking bribes for "research." (Note that
stockbrokers can and still do make a lot of money nowadays, they just need to
be much smarter and trickier about it.)

There's a lot of wrong things in there but let me point out the most obvious.
He talks about the abundance of 10 million ipo's in the 80's and 70's and the
dearth of them today without even mentioning inflation. Let's take the only
concrete example he provided: that of Intel which had an 8 million ipo in '71.
In 2010 money, by using the CPI, this is 43 million (and note that the CPI
tends to underestimate inflation). Are there 40 million IPO's today? Yes there
are.

This small list listing only the most recent IPOs on the NASDAQ shows at least
two 40 mill IPOs:

<http://www.nasdaq.com/reference/IPOs.stm>

So a mere cursory examination of inflation completely destroys the only
concrete example he provided.

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watchandwait
Yeah but the economy is a lot bigger now too. It is an indisputable fact that
the U.S. IPO market smaller in both size and frequency.

It isn't the only cause, but Sarbox has hammered public companies with huge
regulatory costs for absolutely no benefit-- indeed, there is some evidence
that corporate malfeasance is easier today because the rules are so complex,
the true risks are easier to bury. SarBox certainly didn't stop the corruption
in public mortgage finance and investment banks. You could argue that the law
was tougher pre-SarBox-- at least Enron and WorldCom crooks went to jail.

~~~
DTrejo
[...] _at least Enron and WorldCom crooks went to jail._

Good point — modern crooks got bonuses and their companies were saved from
bankruptcy.

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marvin
Doesn't anyone else see a huge opportunity here? If we set aside regulation
for a moment, there is a _huge_ demand for a liquid market for privately held
stock. Both investors and companies would have huge benefits from being able
to trade stock on a market that's not connected to the traditional exchanges.
I'm standing on the investor side of things, annoyed out of my head that it is
impossible to invest in the companies I'd want to unless I had a hundred
million dollars.

There are probably _huge_ regulatory hurdles to a problem like this, but it
would be interesting to see where the excact problem lies. Practically, you'd
need to attract enough investors to make the market reasonably liquid, as well
as gain enough confidence from the market at large that people would want to
participate.

Does anyone know what regulation prevents someone from doing this?

~~~
tapp
> Doesn't anyone else see a huge opportunity here?

Forgive my ignorance, but isn't this essentially what sharespost and
secondmarket are doing?

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marvin
Hehe, forgive _my_ ignorance..these companies are doing pretty much what I was
suggesting. I'm not that versed in the details of reasonably young companies.

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iamelgringo
Let's talk about the list of software companies that are probably going to IPO
in the next couple of years: Facebook, Groupon, Yelp, Pandora, LinkedIn,
Zynga, Twitter

One of the big differences of today's IPO market, is that many of these
company's founders have been able to take some money off the table. The
founders are rich and early employees are able to have some liquidity via
secondary markets. At the same time, there's a lot more capital available to
large companies at this stage than there ever was. (See DST's recent
investments, Andreesen Horowitz's recent investments). So, the typical reasons
that have pushed companies to IPO aren't there any more. That lets technology
companies run for a lot longer before they have to IPO or get huge
acquisitions.

So, while there haven't been as many software company IPO's as there have been
in the past, my gut is that the ones that we do have are going to be larger
and more successful.

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jf271
A $10 million IPO doesn't make any sense when they will have to spend 20
percent of the IPO money on meeting Sarbanes/Oxley requirements in the first
year. It it costs about $2 million a year to meet those requirements.

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kscaldef
I'm not sure I understand point #2 (decimalization). Can someone explain what
he is getting at?

~~~
allwein
Stocks used to be priced in eighths of a dollar. So if a stock was selling for
$1.50, the next increment up was $1.625 and the next step down was $1.375.
They are now priced down to the penny, so a $1.50 stock can go directly to
$1.51 or $1.49.

I'm not entirely sure why he cites this as a bad thing, but I'm assuming that
there's some arbitrage opportunity to value investors when dealing with
eighths of a dollar (since if a stock was priced at $1.50 but was really worth
$1.55, you'd be getting $0.05 of "free" value by buying it).

~~~
akashs
Don't know if it's in any way the cause of anything related to a decline in
IPO, but this spread is what the banks make money on and what enables them to
do what they do, effectively a measure of their margin on trades. Going from
an eighth to a hundredth just means their margins effectively were reduced,
but was probably a result of an increase in volume / trading activity.

~~~
mdda
I think there is a couple of things going on here, though. Decimalization made
stock market-making less profitable for Investment Banks. And the re-
regulation of stock analysis prevents banks from using research analysts to
tout stocks. By making it worth less to investment banks to invest in
research, every customer has to invest more in research. Arguably this isn't
too bad a problem - until it comes to smaller stocks, where the knowledge-base
of the market is getting hollowed out - and liquidity dries up since no-one
who is not in the stock has much incentive to do the initial research.

The same thing happened in High Yield Bonds. The NASD (FINRA) brought in
reporting system for bond prices (TRACE) that made trading bonds inherently
less profitable for the middle-men (though much more transparent for
investors). That meant that there was less incentive for the middle-men to do
research, causing researchers to leave to join hedge-funds. So the end-game is
a very fragmented market, where if an investor wants to sell a bond, they
don't have an audience that's had any consistent commentary on the situation
from a 'neutral' middleman.

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bryanlarsen
Back in the day, when a $10 million IPO was too big and you wanted to raise
only a million or so one of the places you turned was to the Vancouver Stock
Exchange. (It was also the place to lose your shirt or gain a fortune betting
on penny stock mining firms).

It's changed hands and is now known as the Canadian Venture Exchange, and is
still a great place for sub-$10 million IPO's. It's last IPO was for a mining
firm who raised 5.75 million dollars selling shares at 50 cents a pop.

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vaksel
very good article...but I think it's underestimating the culture shift of
companies not even considering IPOs in that range

~~~
allwein
I'm not sure it's possible to disambiguate his point and the culture shift.
i.e. perhaps the culture has shifted because of the issues he's described.

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fleitz
The part about small caps being sold and not bought is particularly
interesting to me.

Right now I'm working on a stealth project that will address the needs of
small cap and private companies wishing to raise cash on equity. We've had
amazing feedback from the small number of companies and investors already
involved. Think Kickstarter except getting equity instead of cheap plastic
trinkets. We'll also have the ability to get someone to call you who can speak
knowledgeably to the details of the deal and can connect you with a licensed &
regulated professional to handle the execution. $10 million IPOs are very
common, look at an exchange like the TSX.V it's filled with small IPOs in the
Resource sector. A large part of the logic behind the proposed TSX / LSE
merger is to address exactly the concerns of the resource sector and have a
single exchange which is dedicated to the resource sector.

We're going to rock the startup finance scene pretty hard. If you're looking
to IPO think Canada, not California. Our financial institutions are as rock
solid as the Canadian Shield.

[http://www.theglobeandmail.com/news/national/toronto/globe-t...](http://www.theglobeandmail.com/news/national/toronto/globe-
to/the-tsx-and-lse-merger-means-a-new-breed-of-banker/article1904593/)

HFT is much less common in Canada, and it's a perfect market to do a small
IPO. In the last 20 years Canada has drastically changed it's tax code in
relation to corporations. We also don't have Sarbox and other onerous
requirements. I'm not an accountant but IIRC the small biz tax rate is
something like 11%. A $10 million IPO is never going to make the front page of
the NYT but they are definitely out there.

