In recent years, financing for small cap companies has become increasingly difficult to obtain. Companies in their quest for growth capital often enter into agreements that are highly-dilutive and "business-ending" deals. Sure they raise the money, but at what cost?
Rather than attempt a column devoted to the year’s best and worst events or some such top
ten type of thing, I thought I’d write about what I’d like to see happen in the coming year.
There’s no denying that ’09 was a trying year and I’m sure many people can’t wait for it
to end; however, I remain optimistic (and for a curmudgeon like me, that’s no mean feat).
I do believe in the resiliency of the American people. We are an industrious group and we
will come out of this economic malaise better and stronger. We’ve overcome challenges in
the past and we will do so again.
Next year will mark the ninth anniversary of the infamous Wall Street Settlement (I know
that “10th Anniversary” sounds better, but I couldn’t wait). As we know, the settlement forced
the separation of investment banking from securities research. The settlement followed an
investigation into whether some Wall Street analysts were providing misleading ratings of
the companies they covered to generate investment banking business for their firms. Are we
better off today?
Some have called for a repeal of the settlement because it has hurt the competitiveness
of our country by denying small companies the access to research analysts. Given
that small capitalization stock coverage became unprofitable, the separation of research
from banking eliminated banking compensation for analysts that was the last revenue source
used to offset the opportunity cost analysts incur by covering fewer large capitalization
stocks. Large cap stocks are held by armies of investors, many more times over than small
capitalization stocks and, hence, the opportunity for greater commission business. The loss
of investment banking-derived compensation for analysts has contributed to declines in research
coverage of small cap stocks, IPOs and new listings.
At-the-market offerings (ergo, ATM) have gained favor as a means for raising
capital particularly during these somewhat turbulent times. An ATM offering
involves the sale by an issuer of equity securities into the market periodically
over time, typically at the prevailing market price, through a placement agent,
or designated broker-dealer.