condition. However, the European debt crisis intervened yet again, and a market decline turned into a month-long drought for IPOs following Facebook’s botched offering. Deal activity returned sporadically in the second half, but uncertainty surrounding the fiscal cliff resulted in a disappointing end to the year, with the second-slowest November and December since the tech bubble. Still, the overall results showed an improvement over last year. With $43 billion raised, total proceeds were at the highest level since 2007, and the 21% average total return was above market indices. Consumer companies, such as organic food maker Annie’s and discount youth retailer Five Below, and enterprise software providers, most notably Guidewire and Workday,

produced some of the best-performing deals. After starting the year at a record high, the pipeline was cut in half largely due to the passage of the JOBS Act, which allowed smaller companies to file confidentially and created a large shadow backlog.

Key Takeaways:

• IPO proceeds rise, helped by mammoth $16 billion Facebook deal
• 14% average first-day pop is best in a decade
• Search for growth creates diverse group of top performers
• Private equity deal flow rises but lack of large deals causes proceeds to fall 50%       Facebook marks biggest venture capital-backed deal in IPO history
• Investors favor LPs and LLCs in search of yield
• Confidential filings under JOBS Act reduce pipeline visibility

US IPO activity improves marginally in an up-and-down year

In an up-and-down year that started off strong but ended with the second-slowest November and December since the bubble, the

US IPO market was modestly more active in 2012, with 128 deals, up 2% from last year. Total proceeds were up 17% but fell 27% excluding Facebook. IPO activity consisted mainly of smaller deals, as the median deal size dropped 23%. Perhaps indicating a paradigm shift, despite three years of recovery, US IPO activity still has not returned to the historical norm of 150 to 200 annual deals, as the market continues to react strongly to external shocks. Excluding a handful of record IPOs – GM in 2010, three mega private equity-backed IPOs in 2011 and Facebook in 2012 – annual proceeds from US IPOs would have trended below $30 billion.

Technology continues to dominate activity while financial deal flow jumps

Technology was once again the most active sector, accounting for 30% of deals and 48% of proceeds. Deal flow from the financial sector jumped this year, representing 16% of deals and 19% of proceeds, as new financial institutions sought to capitalize on dislocations caused by the financial crisis. The energy sector also made a strong showing, accounting for 20% of deals and 17% of proceeds, as investors snapped up yield-offering LPs and LLCs.

JOBS Act and proliferation of confidential filers stunt pipeline growth

The JOBS Act went into effect on April 5, allowing smaller companies to file confidentially and thus reducing the visibility into IPO filing activity. Only 140 new filers entered the IPO pipeline in 2012, down materially from 257 in 2011 and 253 in 2010. The current pipeline has 117 companies seeking to raise a total of $35.7 billion, down from 146 companies and $45 billion at the end of the third quarter. Of the 117 companies in the pipeline, 49 are considered to be active, having filed an amended document within the past 90 days. The shadow pipeline of companies that have filed confidentially with the SEC could range anywhere from 60 to 100 companies. Among the recent actual IPO filers, notable companies include the American unit of retirement, investment and insurance company ING, Bright Horizons Family Solutions, which offers work site child care and early education centers, and Zoetis, Pfizer’s animal health unit, which is expected to launch in early 2013 and could raise as much as $4 billion.

Enterprise software company AppSense, traffic data provider Inrix and sandwich shop chain Potbelly Sandwich are among a list of companies that have tapped banks in preparation of an IPO. MGM Holdings and Violin Memory have already submitted confidential filings. SpaceX could be Elon Musk’s third IPO attempt in four years, after Tesla Motors (June 2010) and SolarCity (December 2012). Overall, our proprietary Private Company Backlog holds nearly 180 companies, with strong representation from e-commerce and enterprise software firms.

Facebook makes up for fewer billion-dollar deals

Facebook’s much-anticipated offering headlined IPO activity in 2012. It raised $16 billion in proceeds (38% of total), making it the third-largest US IPO of all time, behind Visa and ENEL, and the seventh-largest global IPO on record. Facebook’s mammoth deal more than made up for the drop in billion-dollar IPOs this year (four compared to six in 2011). Other major 2012 offerings include the dual listing of Santander’s Mexican division and Apollo-backed Realogy, the largest real estate brokerage in the US.

Facebook and poor performance put hiatus on Internet IPOs

A total of 13 Internet IPOs raised an average of $90 million (excluding Facebook), representing 43% fewer deals than in 2011. The year started out strong with seven deals pricing in the 1Q12 compared to four in the 1Q11. However, Groupon and Zynga, which went public in late 2011, suffered massive declines in 2012 (both down 76%), which, combined with Facebook’s mismanaged offering in May, deterred potential Internet companies from moving forward with their IPOs. There were only five post-Facebook Internet IPOs, four of which were completed after August.

Facebook IPO highlights down year for venture capital

Facebook was the biggest VC-backed deal in IPO history and drove a 163% increase in VC proceeds year-over-year. However, excluding Facebook, VC-backed IPO activity was down 16% in terms of deal flow and 43% in terms of proceeds. Excluding Facebook, the average deal size was $104 million, down 32% from 2011. Internet IPOs were the biggest detractors for VC-backed IPOs as the number of deals fell 33% year-over-year and represented 26% of deal activity compared to 35% last year.

Technology continues to dominate activity while financial deal flow jumps

Technology was once again the most active sector, accounting for 30% of deals and 48% of proceeds. Deal flow from the

financial sector jumped this year, representing 16% of deals and 19% of proceeds, as new financial institutions sought to capitalize on dislocations caused by the financial crisis. The energy sector also made a strong showing, accounting for 20% of deals and 17% of proceeds, as investors snapped up yield-offering LPs and LLCs.

Chinese IPOs curtailed for second straight year

Chinese IPOs reached their lowest levels since 2003, with only two deals completed, representing an 83% decline from 2011 and a 95% decline from 2010. Investors continued to be wary due to the breakout of fraud in 2011 and, more recently, SEC investigations of Chinese auditors. Also contributing to the abatement was an economic slowdown in China, as evidenced by the lack of deals listing on the Hong Kong and Shanghai exchanges. Both US listings this year, however, had strong showings for the year as flash sales website Vipshop (+174%) and social platform YY (+36%), potentially giving other Chinese companies confidence to move forward with US IPOs in 2013.

Investors favor LPs and LLCs in search of yield

LP/LLC deal activity reached its highest point in the last nine years, benefitting from yield-hungry investors who were forced by Fed policies to seek dividend-paying stocks, in many cases yielding over 6%, rather than bonds. While deal flow was up only slightly, proceeds increased 81% due to a 68% rise in average deal size to $315 million compared to $187 million in 2011. Notably, all but one 2012 LP IPO came after June 1 and the last three deals added to the 2012 calendar were yield plays.

US IPO Index dragged down by Facebook, lags benchmark in 2012

The FTSE Renaissance US IPO Index (IPOS), a measure of post-IPO performance, rebounded from a weak 2011, but underperformed domestic equity benchmarks with a 12% return in 2012 (Russell 3000: 14%). Positive returns were primarily driven by industrial and consumer stocks, which contributed a combined 8% to overall index returns. Strong performers include LinkedIn (+82%), Delphi Automotive (+78%), Michael Kors Holdings (+87%) and General Motors (+42%). Facebook was, by far, the index’s largest detractor as the social network’s post-IPO decline subtracted 1% from index returns.

Is IPO volatility here to stay?

Now three years into the recovery, the IPO market remains well below the levels seen in the last cycle. The average deal count of 136 in the last three years is well below the 205 average of 2004 to 2007. Over the last decade, the IPO market has become increasingly captive to the underlying stability and trends of the overall equity markets. When major exogenous events, such as the European debt crisis and the fiscal cliff, roil the securities markets, IPO activity slows or shuts down altogether (e.g. August- October 2011 and May-June 2012). US IPO activity has also been below the levels we would expect in a normal economic rebound because of the tepid nature of the current recovery (unusually slow GDP growth and ongoing high unemployment) despite unprecedentedly expansionary monetary policy. The JOBS Act, which was touted as a way of opening the IPO market to small growth companies, has had no noticeable effects other than reducing the minimum time from filing to pricing. Without more structural changes, we are less optimistic that the JOBS Act in and of itself will solve some of the issues facing the US IPO market. The good news is that the IPO backlog, including the large shadow backlog, continues to grow, and IPOs by smaller companies actually rose in 2012. To see a good year in 2013, the IPO market will need not only a constructive resolution to the fiscal cliff, but also a steadier recovery in the broader equity markets.

Source: Renaissance Capital is the leading provider of institutional research, valuation and analytical tools for assessing upcoming IPOs and tracking the global IPO market. The Firm maintains the FTSE Renaissance Global IPO Index Series and provides IPO-focused investment management services through the Global IPO Fund (IPOSX) and separately-managed accounts.

Public debt and equity issues fell to $1.07 trillion between 2009 and 2010, while private issues rose to $1.16 trillion

By DANIEL GORFINE AND BEN MILLER  / Wall Street Journal February 4, 2013

A tectonic shift is under way in how companies raise money—and it will have a profound impact on U.S. investors and markets. According to the Securities and Exchange Commission’s most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.

Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April.

The crowdfunding provisions in the JOBS Act are intended to democratize investment opportunities using the Internet and have attracted the most public attention. But another part of the law may have the most impact.

Here is the background. U.S. securities laws have a private-market exemption, called Regulation D, that allows companies to sell securities to accredited investors with high net worth (essentially more than $1 million excluding a home). The exception means the companies don’t have to go through the SEC’s costly and time-consuming registration and reporting requirements for public offerings. The securities can also be resold to financial institutions that hold a required minimum value of securities investments.

But the securities laws have also banned general solicitations for these private-market offerings—and Title II of the JOBS Act lifts this ban. This means that a company, investment fund or seller now can publicize its offerings via the Internet or traditional advertising media, as long as the ultimate investors are accredited or qualified institutional buyers.

One of the most significant advantages that public markets have held over private markets is the ability to generate substantial market liquidity by advertising to a wider public. Once the SEC implements the legislation, that advantage will gradually fade away.

Until the JOBS Act, Regulation D effectively allowed companies and funds to raise capital only from investors with whom they already have a pre-existing relationship. So money typically flowed into a deal through broker-dealers or arbitrary social networks. This process shuts out a wide swath of prospective investors and, thanks to the lack of a robust trading market, results in lower prices for the securities.

By rolling back the ban on general solicitation, fund offerings and resales of unregistered securities can now flow through vast Internet-based broker-dealers and other finance networks, potentially giving a steroid shot to private capital markets.

According to the Angel Capital Association, there are 8.6 million accredited investors nationwide, of which only 3.1% currently invest in business startups through private markets. The large pool of untapped investors and capital may result simply from a shortage of information regarding investment opportunities or concerns over private market liquidity.

Thanks to the JOBS Act, private capital markets will enjoy increased transparency and therefore greater efficiency. They will also likely experience substantial new capital inflows due to the widespread advertising of offerings. If high-quality companies and funds have access to broad and deep pools of capital in private markets, then the question becomes why many of them would bother with the regulatory compliance and shareholder-management costs of public markets.

We anticipate a paradigm shift in how companies raise money, as they increasingly shun the highly regulated, costly and volatile public markets in favor of now deeper and more efficient private markets. This could be a boon for capital formation.

But it could also mean fewer investment opportunities for the general public. The most promising companies may delay or never file IPOs and instead seek capital on private exchanges not accessible to those who don’t qualify as accredited investors—which is 97% of the U.S. population. Meanwhile, novice accredited investors may be bombarded with solicitations for private placement opportunities, without some of the regulatory oversight provided in public markets.

For lawmakers and regulators, however, perhaps the lessons from the success of private markets can help with a reform of public securities regulations, many of which were written nearly a century ago and, at least in part, are the reason for the continuing privatization movement.

Mr. Gorfine is legal counsel and director for financial markets policy at the Milken Institute. Mr. Miller is co-founder of Fundrise, an investment platform that enables direct investment in local real estate and businesses.

New rules will affect all First Quotation Board listed companies

By Sarah Lacy
On November 28, 2012

I’ve been hearing about the so-called Series A Crunch for at least six months, and in recent weeks, I’ve spoken with more than 20 venture capitalists, angel investors, incubator heads, lawyers, and other necessary cogs in the ecosystem trying to get some details about it.

Everyone — to a person — says it’s a real phenomenon. And everyone gives the exact same explanation of why it’s happening. But what it means for the Valley, and when this tidal wave of companies unable to raise more cash will hit the beach, remains frustratingly hard to quantify. Many worried investors have been asking me what I’m hearing as much as I’m asking them what they’re seeing.

We know this: As many as a thousand companies who’ve received seed rounds won’t be around in a year — maybe six months. There simply won’t be soft-landings and acqui-hires for all of them.

Essentially, we got here by entrepreneurs having too much of a good thing. The number of seed and angel investors has exploded in recent years, buoyed up by a number of factors.

They include a dramatic lowering of capital needed to start a company, substantially lowering the cash needed to become an angel. And because capital requirements are lower, entrepreneurs are holding onto more ownership, making it a lot easier to flip your company for less than, say, $30 million and become very rich. Angels begot quick wins that produced even more angels. Meanwhile, the rash of early liquidity and recent IPOs — unsatisfying as they were — gave liquidity to thousands of employees at large companies, and a subset of those made very real money.

Add to this regular angels becoming “super angels” — a much-mocked phrase for when someone goes from investing their own money to investing institutional funds. Essentially they became micro-VCs, still investing at the seed level but with much greater resources behind them. Incubators, too, helped flood the markets with even more startups, and AngelList played its part too. As All Things D reported yesterday incubators alone have yielded thousands of companies, created nearly 5,000 jobs, and raised $1.6 billion. Those numbers are likely conservative.

Because of all of this, traditional venture firms were getting edged out at earlier rounds. They decided to fight back. Firms like Accel and Greylock and Menlo Ventures announced discovery or seed funds, while other firms like Sequoia Capital and Andreessen Horowitz pioneered stealthy scout programs to give entrepreneurs their money, whether they knew it or not.

It seems everyone in this generation sought to emulate the Ron Conway-style of angel investing: Go wide and invest a little in a lot of things. A name like 500 Startups says it all.

At each turn, these market changes were heralded as wonderful developments for entrepreneurs. More cash equals more entrepreneurs who get to start companies. Many people in the ecosystem simply see no downside to that. Others have blamed the brutal hiring environment on everyone being able to start a company — whether they should or not — and argued that concentrating resources on fewer ideas would make the Valley a lot stronger.

But wherever you stand on that, there’s one very real consequence of this explosion in seed funding: There has not been a corresponding explosion in investors willing to lead the next round, the so-called Series A. In fact, if anything, there are fewer.

In the late 90s there was an explosion of capital at every level. This time around, there has been an explosion at the early stages, and the very late pre-IPO growth stages. But the Series A has remained the same. While Series A is what everyone is focusing on now, life doesn’t get much easier for those who survive. Finding a Series B will be even harder. (Although there are signs that once you survive those two stages, it’s a lot easier to raise Series Cs and Ds.)

That means we’re getting a very different “nuclear winter” as a result of industry excesses this time around. And by most accounts, it’s a far more benign one, considering that potentially thousands of companies are — and will be — going out of business in droves over the next year.

You may never hear about these deaths, and their teams will get rapidly reabsorbed back into the system that’s still very hungry for talent and still seeding tons of new deals. By the math in that ATD post, each incubator grad only employs about three people on average. At most, we’ll see more stories like Erin Griffith’s this morning on the social travel space when eagle-eyed reporters follow up on a funding announcement they covered months ago, only to see a vague landing page about a much-needed vacation has taken the company’s place.

Companies we never really got to know are simply starting to fade away. Multiply that by literally a couple thousand, and that’s what 2013 is going to look like in Silicon Valley, and to a lesser degree some other startup ecosystems. “The numbers just don’t add up,” says Jon Callaghan of True Ventures. “There are a minimum of 2,000 companies per year getting funded and coming out if incubators, and there are only 750 VCs that call themselves ‘active.’ But when you look at who is doing at least two deals a quarter, the numbers fall to just 200 firms. Those firms are only going to do a few Series A deals a year.” When you look at the number of firms who invest at least $1 million a quarter for at least four straight quarters, the number drops further: To a paltry 97 firms.

The numbers I’ve heard from most everyone is that only about 20 percent of companies that have gotten a seed round in the last year will be able to raise a Series A. To put that in perspective, imagine a game of musical chairs with a hundred kids and just 20 seats. I recently went to a networking event for one of the seed funds that invested in PandoDaily, and I’ve never seen such worry on the faces of the entrepreneurs. They wondered as they looked around what lucky few of this crop the VC in question would actually back with a traditional venture round.

That much, we all agree on. But there’s no consensus on what it means for the Valley, and where we are in this crunch. Has it started? Will there be a big lump of companies running out of cash all at once? Or is this simply the new cycle of life in the Valley for the next few years? “It’s not a Series A crunch per se. It’s just getting easier to raise early rounds and harder to raise later rounds,” says Y Combinator’s Paul Graham over email, hewing to the latter view that this has merely become startup life in the Valley. “Investors will pay to see how an experiment turns out, but they are brutally unforgiving, if it doesn’t turn out well… What used to be an obelisk is now becoming a pyramid.”

Mike Maples of Floodgate Fund may have the most Darwinian take on it all — always a surprise delivered in his warm, folksy Andy Griffith-like Texas accent. “The tech industry creates roughly 10 awesome companies per year,” he says. “That’s independent of how much money VCs have or how many companies funded. There are 10 awesome companies a year, and they will get funded. It’s pretty simple.” He says if a company is going to be successful you can see it in 18 to 36 months. If you don’t, that company simply shouldn’t get to take up any more of the Valley’s rich resources — whether that’s talent or people. Sorry.

Hands down the people who are most concerned about this trend are the angel investors. And Maples would argue a lot of his peers have only themselves to blame — along with the venture industry at large.”The venture business in general is wildly undisciplined about throwing good money after bad,” he says. “There are so many companies in Silicon Valley that have raised $30 million and done absolutely nothing with it.”

On a micro level, failure is always painful. But at a macro level, widespread failure this early is far less painful than if it came at later stages. The stakes for everyone are lower. There is still enough froth in the Valley that entrepreneurs and their teams can easily get reabsorbed back into the system, or just head back to a place like YC for another try. The most resilient entrepreneurs embrace the experimental nature that Graham describes above. “I wouldn’t expect anyone except seed investors to complain about it,” Graham says. “Founders don’t think their problems are due to trends. And in fact, overall trends are a second-order effect for founders.”

Put another way: Maples is right. Great companies will thrive and find cash no matter what goes on in the outside world. They don’t have to worry. But the angels who’ve staked their funds on spreading bits of money all over the Valley are increasingly anxious that only 20 percent of their deals — in aggregate — will get the chance to keep going. That’s fine if you have a home run in that 20 percent. If all you have are a bunch of flips and acqui-hires, the picture isn’t pretty.

If the “great” companies will be okay, the ones these angels say they worry about are the “good” companies. Screw ‘em, say the Darwinists like Maples. Not so fast, say angels who’ve invested with the Ron Conway-like strategy. Maples — unsurprisingly — has little patience for that world view. “The losing mentality is the mindset of playing a lot of hands of poker at the same time,” Maples says. “Investors should be saying, ‘What are all the things that need to be put in place to make this one of the 10 companies of the year?’”

Don’t even get Maples started on pivots. He helped coin the term, but it has been bastardized of late to mask failure. “Too many companies are one pivot away from something they can’t even articulate,” he says. “That’s just keeping the plates spinning.”

In off the record conversations, many angels have expressed the urgency of self-discipline. If they try to pass their dogs off to VCs, they ruin any credibility when advocating for an edge case company that may not yet have the traction but may have something intangible going for it.

Expect many more angels to back away from the category. Already we’ve seen “angels” like Chris Sacca, Ron Conway, and CrunchFund doing late stage and secondary cash-outs well before this crunch started. And noted New York angel Chris Dixon recently made the leap to the venture world. He may be a canary in the coal mine for the industry. Most of these guys got into angel investing because that’s where the biggest gap was back in the mid-to-late 2000s. Now it’s glutted. “The real winners here are going to be the seed funds and early stage VCs that can write a $1 million to $2 million check,” says AngelList co-founder Naval Ravikant. “They’re buying into companies post-seed funding, with traction, at prices that aren’t significantly higher than angel prices.”

So when does this bizarre, quiet, slow-moving Armageddon hit? Out of the 20 or so people I spoke with for this story, only one told me there’s massive carnage happening right now. The rest said companies are mostly still hanging on. They’re cutting salaries and making the last tens of thousands — or if they’re lucky a hundred thousand — last.

Meanwhile, there’s been a surge in follow-on seed deals. Investors like First Round Capital and Jeff Clavier’s SoftTechVC all report doing way more of these than they have in the past. “It’s not the normal course of things, but you’re seeing a lot of companies raising second and third seed rounds,” First Round’s Josh Kopelman says. And not all of these have proven to be dogs. Some, like TaskRabbit, just needed a bit more time to get to that magical and vague term “traction.” “At some point, they won’t be able to raise a third or fourth extension,” Kopelman says.

Startups are scrappy, and many turn to AngelList when the money runs out. “We see a much larger number of companies coming in to fill out their bridges or to raise a second seed round,” says Ravikant of AngelList. “We tend not to feature those or be able to help much unless they have traction.” In other words: You’re increasingly on your own once that early cash runs out.

That’s the benefit of taking money from a microVC or super angel, say some entrepreneurs. They can stretch your seed round a bit further than an individual angel. Meanwhile, many of these angels are spending increased time looking for soft landings for these companies, hence the rash of acqui-hires in recent months. But there are nowhere near enough of those landings to go around.

These delays won’t last forever. Callaghan expects the meat of the crunch to hit in the first quarter of next year, but notes with a laugh he’s always a quarter or two early when it comes to predicting timing with any venture trend. Any shakeout moves more slowly than you’d expect. Entrepreneurs are survivors by nature.

If you are raising a seed round now, there are a few things you can do to protect yourself. There are still the same debates on whether or not you should take seed money from VCs. On the one hand, they are the guys who will be doing these rare Series As, so you may have a leg up on an entrepreneur they don’t know. But if you raise seed funds from a VC, and they chose not to invest your Series A, that can be a negative signal to anyone else who might be interested.

The tip that everyone agrees on is to avoid the so-called party rounds. These were rampant over the last year, and are when a collection of angels all put in a little. The hope was having more firms involved would help with hiring, raising more money, or anything else a first time entrepreneur might need. In reality, no one has much skin in the game. If you are going to have a flood of investors, make sure there’s a clear lead who believes in you and your vision. Otherwise, you’ll have to show massive traction to compete with all the other entrepreneurs who have that kind of advocate in their corners.

Many have hoped, too, that the convertible note dies off somewhere in this quiet, rolling carnage of once-good ideas. VCs have never liked them, arguing they misalign investors with entrepreneurs. Now they’re pointing out to companies that they are only advantageous to startups when things go well.

Lastly, seed-stage entrepreneurs who have pushed for the maximum valuation possible haven’t done themselves any favors. Unless they show significant traction, getting an up-round will be a challenge. Meanwhile, their seed investors aren’t particularly incentivized to get them a Series A that crams the previous valuation down.

In a Valley that’s always had an uneasy relationship with where luck ends and skill begins, a little historical perspective may help entrepreneurs weather the next six months. In the history of the Valley’s booms and busts, many of great entrepreneurs have failed and many idiots have succeeded. It’s the tax for living somewhere that so many people get the chance to try.

Trade Associations Serve Industry’s Explosive Growth with Strategic Business Summit

 Washington, DC and New York, NY – October 29, 2012 – The Distributed Computing Industry Association (www.DCIA.info) and the Cloud Computing Association (www.cloudcomputingassn.org) today announced that Derek Cahill of MD Capital Advisors will participate in CLOUD COMPUTING WEST 2012 (CCW:2012), the trade groups’ inaugural strategic business summit taking place November 8th-9th in Santa Monica, CA.

“We’re thrilled that Mr. Cahill will be speaking at this event,” said DCIA CEO Marty Lafferty.

Mr. Cahill will address investing in cloud computing and public equity markets in a panel session taking place at November 8^th, 2012 at the Doubletree Suites in Santa Monica, CA.

CCW: 2012 will feature more than ninety speakers in three co-located conferences focusing on the impact of cloud-based solutions in the industry’s fastest-moving and most strategically important areas: entertainment, broadband, and venture financing.

“Along with an outstanding speaking faculty for our first joint effort with the DCIA, we are also very pleased with the level of participation among exhibitors and sponsors for CCW:2012. This promises to be an enormously valuable and stimulating experience for attendees,” added CCA Executive Director Don Buford.

More information is available at http://bit.ly/TLnJCT and delegates can register to attend at http://bit.ly/RoMHCW.

About MD Capital Advisors

MD Capital Advisors has over a decade of international experience of building, running and financing public companies. Our company represents a diverse portfolio of emerging healthcare and high-tech companies that are seeking access to public equity markets to raise capital and to create a currency that can be leveraged for strategic acquisition and unique roll up opportunities. Accessing capital through traditional venture capital, banks and private investment is no longer an option for many companies. Companies who want to maintain control of their company and who have a huge growth potential, large market opportunity or unique product, going public through a reverse merger or S-1 registration can offer many advantages.

About the DCIA

The DCIA is an international trade organization, established in 2003, with more than one-hundred industry-leading member companies, including software developers, broadband network operators, and content providers. The DCIA conducts working groups, oversees political initiatives, and publishes the weekly online newsletter DCINFO.

About the CCA

The CCA is an independent membership organization, founded in 2012, dedicated to building a community of end-users and service providers of cloud-based solutions and products through individual professional memberships and industry conferences. The CCA has quickly amassed a contact list of three-hundred thousand industry participants.

Media Contacts

Kelly Larabee
+1 410-476-7965
kelly@dcia.info

Ria Lubis
212-300-2523
rial@cloudcomputingassn.org   

The SEC met on August 29th to discuss the required implementation of the JOBS Act.  Specifically, the meeting focused on Title II of the Act in connection with lifting the ban on the general solicitation and sale of certain securities.  The SEC proposal under Regulation D, Rule 506, which will soon be known as Rule 506(c), is subject to a 30 day public comment period.

******************

2012-170
source: SEC – http://www.sec.gov/news/press/2012/2012-170.htm

Under the proposed rules, which are mandated by the Jumpstart Our Business Startups Act, companies would be permitted to use general solicitation and general advertising to offer securities under Rule 506 of Regulation D of the Securities Act and Rule 144A of the Securities Act.

“I believe that the proposed rules fulfill Congress’s clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings,” said SEC Chairman Mary Schapiro.

The Commission will seek public comment on the proposed rules for 30 days. Shortly thereafter, the Commission will review the comments and determine whether to adopt the proposed rules.

# # #

FACT SHEET

Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings

Background

The Current Offering Process

Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the SEC’s exemptions from registration prohibit companies from engaging in a general solicitation or general advertising in connection with securities offerings – that is, advertising in newspapers or on the Internet among other things. Rule 506 is one of those exemptions.

JOBS Act

The JOBS Act, enacted earlier this year, directed the SEC to remove the prohibitions on general solicitation or general advertising for securities offerings relying on Rule 506. By requiring the SEC to remove these restrictions, Congress sought to make it easier for companies to inform the public that they are seeking to raise capital through the sale of securities.

In particular, Section 201(a)(1) of the JOBS Act directs the SEC to amend Rule 506 to permit general solicitation or general advertising provided that all purchasers of the securities are accredited investors. It also says that “[s]uch rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”

The new law also directs the SEC to revise Rule 144A, which governs the resale of securities primarily by larger institutional investors known as qualified institutional buyers (QIBs). Under current Rule 144A, offers of securities can only be made to QIBs. Under the new law, Rule 144A would be revised so that offers of securities could be made to investors who are not QIBs as long as the securities are sold only to persons whom the seller reasonably believes are QIBs.

The Proposed Rules

Rule 506

Under the proposed rules, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that:

• The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
• All purchasers of securities are accredited investors, because either:
  • They come within one of the categories of persons who are accredited investors under existing Rule 501.
  • The issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.

Under Rule 501, a natural person qualifies as an accredited investor if he or she has individual net worth – or joint net worth with a spouse – that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Or, if he or she has income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

In determining the reasonableness of the steps that an issuer has taken to verify that a purchaser is an accredited investor, the proposing release explains that issuers are to consider the facts and circumstances of the transaction. This includes, among other things, the following factors:

• The type of purchaser and the type of accredited investor that the purchaser claims to be.
• The amount and type of information that the issuer has about the purchaser.
• The nature of the offering, meaning:
  • The manner in which the purchaser was solicited to participate in the offering.
  • The terms of the offering, such as a minimum investment amount.

The SEC’s proposing release notes that proposing specific verification methods that an issuer must use “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor … We are also concerned that a prescriptive rule that specifies required verification methods could be overly burdensome in some cases, by requiring issuers to follow the same steps, regardless of their particular circumstances, and ineffective in others, by requiring steps that, in the particular circumstances, would not actually verify accredited investor status.”

The proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that companies conducting 506 offerings without the use of general solicitation and general advertising would not be subject to the new verification rule.

Rule 144A

Under the proposed rules, securities sold pursuant to Rule 144A could be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe is a QIB.

Form D

The proposed rules would amend Form D, which issuers must file with the SEC when they sell securities under Regulation D. The revised form would add a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and general advertising.

Video: Open Meeting

Chairman Schapiro discusses the proposed rule:
Windows Media Player

---

Text of
Chairman’s statement

Washington, D.C., Aug. 29, 2012 – The Securities and Exchange Commission today proposed rules to eliminate the prohibition against general solicitation and general advertising in certain securities offerings.

http://www.sec.gov/news/press/2012/2012-170.htm

#jobs act, #rule 506, #crowd funding

The concept of crowdfunding to launch and grow your business may seem like a dream come true—reduced cost of capital, access to new pools of investors, the community opening their arms and wallets— all giving your business a shot to make it big.  While crowdfunding (both donation and equity based) offers amazing opportunities, it also brings fiduciary responsibilities, commitments of time, reporting requirements and the potential to let down the people who mean most to you in the world if the unforeseen happens and failure occurs.

As the authors of the Startup Exemption Framework that made debt- and equity- based crowdfund investing legal, we take the responsibility of educating entrepreneurs and investors extremely seriously. Anyone that has been in the private equity or entrepreneurial community long enough knows how hard it is to raise capital, whether that is from your professional investors or from friends and family.  We want to ensure that people crowdfund responsibly—which is why we will be contributing updates, data and advice to TechCrunch readers in the coming months.

1. Don’t Force People to Drink your Kool-Aid

Whether you are launching a donation-based campaign on Kickstarter for a new gismo or are preparing your online and offline networks for your new software company’s equity campaign launch—DON’T BE ‘THAT GUY.’  We have all heard him –the one that talks endlessly about his company and dreams and takes it personally if people don’t kick in to meet his Kickstarter goal. Business opportunities come and go, and if you push people too hard for dollars, you may see more people go in your life. While you have to get your networks ready, do so tactfully and legally. If people are not interested don’t keep pushing, as you never know their reasons for not kicking in. A better approach is to engage with your network before asking for money—see if they would be willing to evaluate your business plan or critic your pitch idea.  Engage them, have them mentor you—people want to feel like they are helping and giving back. Also by asking people for their advice and help before asking them for money, you are also ensuring that you will overcome their personal objections when it does come time to ask for funding.

2. The Impact of Failure on Those Close to You

Above all we advise entrepreneurs to never allow people to invest more than they would be comfortable losing. While no one ever wants to believe their idea could fail the reality is that, according to the SBA, 50 % of business fail within the first five years. While we believe crowdfunding will reduce those rates—as the SBA attributes 65% of all failures to a lack of capital. If failure does occur, you are going to need your friends and family to support you. While there are provisions that limit the amount of funds an unaccredited investor with a net worth under $100,000 can invest to $2,000 per year (or 5% of their annual income or net worth, whichever is greater), do you really want your uncle putting himself in a bind to fund your business?

3. Plan Ahead to Avoid Investor Dread

Could you imagine adding an extra 10 hours a week of email management to your schedule? For crowdfunded companies that do not plan and execute properly, this can become their new reality. As novice investors can often require additional calls and emails, investor relations can quickly become distracting and overwhelming. Before you know it, your business could suffer… leading to even more calls and emails.

When you use crowdfunding to fund your business, you need to plan for ongoing communication with your donors and investors and set their expectations early and often about how you will communicate with them. Think about how you can create scalable ways to communicate.  Is it a quick email update? Does your crowdfunding platform have online IR services that you can use?  What will your cadence of communication be?  Are you planning on using a publicity firm to help you manage the communication? If so, you need them to provide a plan before you launch your campaign.

Create a private group using Google, Facebook and/or LinkedIn groups to communicate with members. Set expectations up front on when updates will be given and never miss a deadline. The main point is that you need to be prepared to give regular updates—continuing to set and meet expectations regarding communication.

4. Don’t Sweep Dirt Under the Rug

Communicating openly is critical. While publicizing achievements, new product developments, media coverage and good news is a must. You will also want to share issues or problems that may negatively affect the company with your investors. It is always better to be the one breaking the bad news. Most investors understand that hiccups occur, deadlines get missed, and circumstances can require a pivot to new opportunities—the key is to openly communicate and maintain communication during the good times and bad. 

5. Be in the Know

While the JOBS Act laid out general guidelines, the specific regulations crowdfunding companies will have to follow are still being written. All the same fundamentals for starting a business remain unchanged for crowdfunders.  Start now to prepare to ensure that you will be ready in 2013, when equity and debt based crowdfunding becomes legal.  Many of these steps will need to be completed now in order to be compliant and fully prepared. 

There are a great deal of resources online that can help, sites like the Crowdfund Regulatory Intermediary Advocates(CFIRA) and the Crowdfunding Professional Association (CfPA), offer updates and training as well as conferences that will prepare companies to succeed in crowdfunding and stay within the confines of the laws.

As an entrepreneur, you certainly have a clear vision for your business, but this vision needs to be communicated to others. Investors need to be confident in your ability to create measurable value, especially if you do not have an existing track record of successful startups already under your belt. Show them why your business is worth funding and be ready to listen, when they give you advice. By spending a bit of time in preparation and communicating clearly with your investors in scalable ways—you can harness the power of the crowd and not be overwhelmed by it.

Below is an article from July 24th from MarketWatch.

“Is water the gold of the 21st century?” asks Fortune. Answer: Yes, water is the New Gold for investors this century.

In 2010 global water generated over a half trillion dollars of revenue. Global world population will explode from 7 billion today to 10 billion by 2050, predicts the United Nations. And over one billion “lack access to clean drinking water.”
Climate and weather patterns are changing natural water patterns. And industrial pollution is making water a scarce commodity. So the good news is that huge “opportunities exist for businesses that can figure out how to keep the pipes flowing.”

Yes, it’s a hot market. So, expand your vision for a minute. How many bottles of water do you drink a week? How much did you use for a shower? When you flushed a toilet? Wash your car? Cooking? Lattes? And my guess is your city water bill’s gone up in recent years.

So ask yourself: What happens in the next 40 years when another three billion people come into the world? Imagine adding 75 million people every year, six million a month, 200,000 every day, all demanding more and more water to drink, to shower, to cook, to everything. All guzzling down the New Gold that’s getting ever scarcer.

Population, the explosive driver in the demand for ever-scarcer water

Now here’s the real scary stuff, the investor’s basic multiplier. In the 12 short years leading up to 2011 the world added a billion people. China’s population is now 1.3 billion. Plus they’ll add another 100 million in the next generation, while India adds 600 million according to United Nations experts.

China’s already planning as many as 500 new cities to house all their new folks. Imagine, 500 new cities each housing 100,000 or more people, and that’s just for half of China’s projected growth to 2050, all demanding more water. The numbers are overwhelming.

Today Americans use 150 gallons a day, compared with 23 gallons in China. But they’re catching up, just check out any panoramic travel photos of China’s beautiful megacities, Shanghai, Beiiing, Guangzhou. And read about skyrocketing sales of Ferraris, Cartier watches, Gucci handbags and luxury goods in China. China has its own version of the American Dream!

Seriously, just a few decades ago China was an emerging country, a bit backward, not a global economic threat. But change is happening at light speed. Soon their GDP will overtake ours.

India expects their water demand to double in one decade while Fortune says “expanding populations will also swell demand for agricultural water some 42% by 2030,” in two decades.

China’s mining “new gold,” for agriculture, industry, economic leadership

You probably “think individuals consume the most water,” says Fortune. Not so. Agriculture accounts for 71%, and industry another 16% for a total 86% of all water use in the world. It even takes 71 gallons to produce a single cup of coffee, forcing Starbucks to “cut its in-store water usage by 25% by 2015 with, for example, espresso machines that dispense less water.”

Here’s Fortune’s summary of the global market for all water users: Total worldwide revenues of $508 billion in 2010 … the bottled water market generated $58 billion of that total and growing fast … industry needs $28 billion for water equipment and services to all kinds of businesses … another $10 billion covers agricultural irrigation … another $15 billion in retail products like filters and various heating and cooling systems … $170 billion is used for waste water, sewage systems, waste-water treatment and water recycling systems … and $226 billion for water utilities, treatment plants and distribution systems. Read our Weekend Investor column on food and water investments to weather the drought.

New Gold hidden in steaks, auto tires, chickens, designer jeans

So humans consuming lots of bottled water are not the world’s biggest guzzlers. It’s our lifestyle and consumer habits that accelerate the impact of population growth. Everything we eat, wear and use has a big water-use price tag, says Fortune:

“Consider the impact on the water supply when more people in developing nations begin living Western lifestyles. In India alone, water usage is expected to rise by nearly 100% over the next 20 years. Expanding populations will also swell demand for agricultural water some 42% by 2030.”

What we must do is grow more crops “with less water by applying genetically modified seeds, drip irrigation, and other technologies.”

In short, New Gold is costly to purify and the cost will keep going up. So the price of the New Gold will appreciate in the future for investors betting on this key commodity.

Consider this data: It takes 70 gallons of water to produce 50 cents worth of milk, says Danielle Commisso in Carnegie Mellon Today. In Fortune we learn those designer jeans your daughter just bought require 2,906 gallons of water, mostly from growing cotton … a pound of that juicy prime steak you had for dinner required 1,857 gallons … while a pound of that finger-licking-good chicken for lunch used 467 gallons … a pound of rice pilaf is a little less at 407 gallons … how about that bowl of shredded wheat you had for breakfast? A pound needed 160 gallons … and a pound of steel needs a mere 31 gallons … so why does a car requires 104,000 gallons you ask? Most of it from the rubber.

Add it all up and you got mega-opportunities the next generation, in a world adding a staggering 200,000 people each and ever day.

Long-range solutions do exist for coming global water shortages

“The good news is that long-term solutions” do exist for today’s global water problems: “20% of Singapore’s drinking water comes from processed sewage” thanks to innovative superfine filters. China’s constructing a 1,816-mile “aqueduct to move water from rivers in the south to the parched northeast.” And global water companies like Veolia and Suez, in France, and ITT are “partnering with municipalities to manage water.”

“Beating the Coming Water Shortage” was the challenge headlining Fortune’s feature. To get the message across it also highlighted several examples where government and industry are cooperating to “beat the water shortage” problem:

In America a desalination project is underway, at a cost of $700 million, to supply 8% of San Diego County’s drinking water by 2014, a county growing at a rate of almost 17% a decade. The Tampa Bay Water Utility is spending $210 million for Veolia to build a treatment plant to provide 120 million gallons a day for 2.4 million people who had been using well water.

Get your feet wet in wet stocks and watery ETFs

Where can you invest is the New Gold? Easy: Check out the two French giants, the $17 billion Veolia Environment (VE) , a global leader in environmental services. And the $8 billion French company GDF Suez Energy North America, which has customers in 12 states. The $3.4 billion ITT is a competitor in water treatment technology arena. And $1.6 billion Siemens is a new player, in “services and water-purification membranes.”

Water bottlers duking it out for consumer and investor dollars are Coke (KO) , Pepsi (PEP) and Danone. Coke’s “goal is to safely return to nature and communities an amount of water equal to what we use in our beverages and their production.” That’s a partial response to negative press following the 2010 publication of “Coke Machine: The Dirty Truth Behind the World’s Favorite Soft Drink.”

And if all this is new to you, but you want get your toes wet investing in the New Gold, try some water-based ETFs. The Wall Street Journal’s Liam Pleven wrote about four water-based ETFs: PowerShares Water Resources (PHO) is the “largest of the water ETFs, with $852 million in assets.” Other ETFs include: PowerShares Global Water (PIO) ; Guggenheim S&P Global Water Index (CGW) ; and First Trust ISE Water Index (FIW) . But in comparison to Veolia and Suez, these ETFs are a mere drop-in-the-bucket.

So yes, water is the 21st century’s New Gold. And, yes, growing shortages guarantee price appreciation for this ever-scarcer commodity. But still, something doesn’t feel right. Yes, Fortune presents a solid, upbeat picture. But in the end something was missing. Because this does not reveal a serious long-term strategy.

The fact is, no nation on Earth has a long-term plan to reverse the real problem, that’s not the “coming water shortage.” The real problem is our suicidal growth rate adding water users on a planet that’s incapable of feeding 10 billion.

****************
#drinkingwater, #water investing, #cleantech

Sagient Research also announced that Cooley LLP ranked as the number one most active issuer counsel, Schulte Roth & Zabel, LLP ranked as the number one most active investor counsel, and Goodwin Procter, LLP ranked as the number one most active placement agent counsel in the U.S. PIPE market through the first half of 2012.

PlacementTracker, a flagship product of Sagient Research Systems, is well recognized as the leading provider of research, data, and analytics covering the PIPE market.

Commenting on the activity in the PIPE market, Robert Kyle, Sagient Research’s Chief Executive Officer said, “During the first half of 2012, a total of $12.4 billion was raised in 475 transactions (of this amount, 28 transactions totaling $94 million have been announced but not yet closed as of 7/11/12). This compares to $13.9 billion raised through 573 transactions during the first half of 2011. Concerns over Europe and the global economy have prevented the bounce back for the capital markets in 2012 that many in our industry had foreseen earlier in the year. However, the trend towards larger, quality deals in the private placement market continued, with average deal size up 14% over the same period a year ago. We congratulate all of the active members of the PIPE community for continued success in 2012. Most of these firms are long-time clients of PlacementTracker, and we are dedicated to continuing to provide them with market leading data and analytics for our ever-changing industry.”

PlacementTracker’s dynamically updating League Tables are available online at: http://www.placementtracker.com/pt/leaguetables.cfm .

             The First Half 2012 U.S. PIPE Market Investment Banking
                                  League Table
                  By Number of Transactions (through 7/11/12):

                                          Transa
                                           ction
          Placement Agent Name             Count   Total Amount Placed
          Roth Capital Partners, LLC        25           $ 594,955,389
          Rodman & Renshaw, LLC             24           $ 395,988,547
          Cowen and Company, LLC            18           $ 889,628,078
          JMP Securities LLC                16           $ 595,869,049
          Jefferies & Company, Inc.         14           $ 833,313,000
          Leerink Swann, LLC                12           $ 720,064,077
          Lazard                            11           $ 528,742,388
          Piper Jaffray & Co.               10           $ 489,453,135
          Stifel Nicolaus Weisel            10           $ 424,310,754
          Canaccord Genuity Inc. (US)       10           $ 312,074,278
          Aegis Capital Corporation         10           $ 128,093,501
          Oppenheimer & Co. Inc.             9           $ 379,225,000
          Ladenburg Thalmann & Co., Inc.     8           $ 178,586,417
          Craig-Hallum Capital Group LLC     7          $  133,358,705
          Maxim Group LLC                    7           $ 121,770,099
          Wedbush PacGrow Life Sciences      6           $ 292,788,928
          Barclays Capital, Inc.             5           $ 978,500,624
          J.P. Morgan Chase & Co.            5           $ 312,119,903
          William Blair & Company, LLC       5           $ 147,037,530
          Needham & Company, LLC             5           $ 141,128,818
          Global Hunter Securities, LLC      5           $ 109,489,884
          Chardan Capital Markets            5            $ 18,736,500
          Sandler O'Neill & Partners,
           L.P.                              4           $ 132,984,000
          National Securities
           Corporation                       4            $ 60,042,419
          Merriman Capital, Inc              4            $ 34,130,212

          Investment Banking rankings exclude all 144-A Offerings,
           Equity Lines of Credit, At the Market Transactions, Rights
           Offerings, Bought Deals, and all PIPE transactions
           conducted by foreign issuers that trade in the U.S. on the
           Pink Sheets. On transactions where an investment banking
           firm has acted solely as Financial Advisor, that
           transaction has been excluded from that firm's ranking.
           Co-agented transactions award full transaction credit to
           all agents participating (regardless of status of lead
           agent or co-agent). Data is for closed and definitive
           agreement transactions reported as of 7/11/12.

#pipe, #investment banking

July 6 | Fri Jul 6, 2012 10:20am EDT
By Olivia Oran

(Reuters) – U.S. regulators are considering whether stocks of small companies should be priced in increments of more than a penny, a change that could affect more than two-thirds of listed companies.

The Securities and Exchange Commission thought it settled this debate in 2001, when it ruled that stock prices should move in penny increments, ending a practice of quoting stocks in fractions.

But under the JOBS Act passed earlier this year, regulators must reexamine whether bigger increments make sense for smaller companies, as a way to spur more capital formation and trading, which could help employment.

For dealers, who profit from buying shares at one price and selling them at a price that is often one notch higher, increasing the trading increment could bring millions of dollars of additional revenue.

But consumer advocates say dealers’ gains are investors’ losses, and that trading increments should therefore remain at a penny.

This month, the SEC is expected to publish a report on whether penny ticks have harmed small cap companies. Regulators are likely to study the issue at length, so a decision could be months away, according to people familiar with the SEC’s thinking.

A shift in trading increments could affect 70 percent of listed companies, depending on how small company stocks are defined, according to Russell Investments, the Seattle-based fund research and consulting firm. Companies with less than $2 billion in market value are typically considered small capitalization companies.

Brokers say bigger trading increments would allow them to regularly trade shares of companies that they ignore now.

Under the current system of quoting in pennies, if 200,000 shares of a stock trade in a day, and they trade in increments of a penny, dealers could end up sharing $2,000 of profit a day from buying the shares at one price and selling them a penny higher. With such a small pool of potential profits, many dealers will not bother.

INCENTIVE OF BIGGER INCREMENTS

If, instead, shares traded in 10-cent increments, that daily profit could be $20,000, big enough for dealers to be interested.

Brokers say higher trading profits would allow them to offer research on small cap companies, which could attract more investors into the market and beef up trading volume.

“We would invest more money in trading and research if [there were wider spreads] and our returns would justify those investments,” said Gregory Wright, CEO of ThinkEquity, a San Francisco-based boutique investment bank.

And some investors are sympathetic to that notion.

For some midsize fund managers looking to sell big blocks of shares quickly, having active dealers is crucial.

“We run a small cap portfolio and when you make trades you have to be careful and put out trades at 100 shares a time so that it won’t move the markets,” said Joseph Doyle, chief investment officer at Morris Capital Advisors LLC in Malvern, Pennsylvania. “A big part of our decision about when to make trades is to get a sense of what the market will bear and how long it will take us to do a given order.”

But for retail investors, it’s a different story.

Decimal pricing “makes it fairer for retail investors so that they can get a competitively set spread when they buy and sell, instead of an artificially wide spread,” said Steven Wallman, a former SEC commissioner from 1994 to 1997 who fought for decimal pricing of stocks. “This saves them money.”

EASY COMPARISONS

Before the SEC ordered the adoption of decimalization in 2001, stocks were quoted in eighths or sixteenths of a dollar. A shift to penny increments allowed investors to more easily compare prices at which securities are quoted, as well as reduce trading costs by narrowing bid-ask spreads.

Under decimalization, “the markets will be easier to understand for the average investor, who is used to dealing in dollars and cents for every-day transactions,” then-SEC Chairman Arthur Levitt said at the time, testifying before Congress.

The move was also designed to crack down on spread-related scandals on the floor of the New York Stock Exchange, in which traders would quote a very wide spread between what they offered to pay for a small-capital stock and what they would charge for selling it, pocketing the difference.

But more than 10 years after the change was phased in, the impact of trading in penny increments remains unclear.

Market depth – or the ability of the market to sustain market orders without moving the price of securities – “declined significantly following the switch to decimal pricing, suggesting that large institutional orders from pension funds, mutual funds, and hedge funds may actually suffer from reductions in tick size,” Nicolas Bollen, an associate professor of finance at Vanderbilt University, found in a 2003 study.

While wider spreads would encourage brokers to trade small cap stocks as well as devote analyst research to smaller companies, bulge-bracket banks have less of an incentive to push for the change.

These big players typically focus their trading on large cap stocks with substantial volume and liquidity. A company such as Apple Inc trades more than 16 million shares a day, compared with a small-cap company such as Bridgeline Digital Inc , which trades about 112,000 shares daily.

Executives at small-cap companies say wider spreads will hopefully lead to increased after market support, which could encourage emerging growth companies to pursue initial public offerings. But it isn’t the only solution.

“Increasing the spreads isn’t just the only answer though it’s a step in the right direction,” said Bridgeline Digital CEO Thomas Massie.

#smallcap, #sec, #jobsact