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Shrinking IPO Market Stacking Deck Against Ordinary Investors: CFA Institute

Last Updated October 4, 2020 2:31 PM
Yashu Gola
Last Updated October 4, 2020 2:31 PM
Paul Smith, President and CEO of CFA Institute

Non-accredited investors are finding it challenging to access investment opportunities in public-traded companies, said  Paul Smith.

The President and CEO of CFA Institute, an association of investment management professionals, said that public market capital has been on a decline in the US and European markets. He explained that many new ventures decide to run initial public offering rounds when they run out of capital while others choose to be acquired than going public. There is also a class of startups that seek private capital markets – from venture capital, private equity or infrastructure funds led by accredited investors.

The situation has led ordinary investors with minimal options to put their money in. Solutions are emerging in the blockchain technology sector. New startups are tokenizing leading US stocks for passive investments.

Private Capital Growth

Smith referred the Credit Suisse research study  from 2017 that had found a notable drop in the number of US-based public-listed companies between 1996 and 2016 – from 7,300 to 3,600. The plunge had occurred despite the US economic growth of 60 percent over the same time. The report explained that companies that were undergoing mergers or acquisitions were consequentially delisted from the public-traded index. Many companies, over the same period, went out of business.

Between 2013 and 2016, private capital took the lead in funding the most potential startups of that time. McKinsey & Company, a New York-based management consulting firm, found  that tech startups raised three-times more the capital from private investors in 2016 than they did in 2013.

“Additionally, the number of listed companies and initial public offerings in the U.S., the U.K., and the Eurozone [have] been on a steady decline since the heady days of the dotcom boom,” Smith cited from their CFA Institute study. “To that point, activity peaked in the U.S. in 1996, with nearly 700 IPOs. By 2017, that number was barely 100.”

Successful tech companies like Uber, Airbnb, Pinterest, and Dropbox once shared their plans to go public. Now they  now delay their decisions.

Regulatory Hurdles

The US Securities and Exchanges Commission (SEC) asks companies and funds to determine the accredited status of their investors per Rule 501  of Regulation D  of the Securities Act of 1933 . An investor doesn’t fit the criteria if their  net worth doesn’t exceed $1 million. They can also qualify with annual income exceeding $200,000.

The legal complications block an average investor to gain investment opportunities as a wealthy investor does. 2017’s infamous ICO bubble attracted massive investments mainly from non-accredited people. These folks had less options in mainstream finance, which encouraged their interest in ICOs.

As of now, the SEC does not offer ordinary investors any opportunity to become accredited investors. There is no process of regulators or government bodies recognizing capitally underfed investors for their trading talents. It has led the market to a point where a handful of wealthy investors mousetrap the market. Smaller investors have little foresight to identify the next Uber or Airbnb.

Cryptocurrency Tech Could Level the Investment Field

An expensive and time-consuming process has been some of the biggest roadblocks for conducting an IPO round.

With developments in the newfound blockchain space, the tide may be turning for companies and funds to raise capital. Maybe as quickly as they do with private funding. The idea is not about ushering in another wave of initial coin offering rounds. Instead, it is about simplifying the distribution of securities in public sale and raising funds back through a fiat-pegged digital token in a similar manner. A smart contract that utilizes the SEC regulatory framework could be placed in the middle of a public sale to ensure compliance.

And things are developing already as we write this press.

Delaware, home to more than 1 million businesses, has already begun a blockchain initiative program. The goal is to make space for token securities offerings. Swarm, a cryptocurrency startup, tokenized shares of commission-free stock trading app Robinhood for public sale over a distributed ledger. DX.EXCHANGE, a European exchange, also announced the launch of its non-CFD trading services that would allow regular investors to invest in a tokenized version of tech stocks like Apple, Google, Facebook, and Intel.

Featured image from Shutterstock. Paul Smith photo from LinkedIn.