As many readers have pointed out, the IPO drought of the last decade has many causes beyond just decimalization of stock trading. Sarbanes-Oxley has made it significantly more expensive to be a public company than it used to be. Consolidation in the banking and brokerage industries have resulted in fewer specialists and hardly any true investment bankers surviving. The lure of derivatives trading and other rocket science activities on Wall Street have made IPO underwriting look like a staid and prosaic profession, too. Fortunately, people in positions of influence are finally starting to realise that there is no economic future for this country without new public companies.
One requirement of the JOBS Act, passed last April, was that the SEC look at trading decimalization, and especially tick sizes, to see if there has been an effect on small cap company liquidity. If the SEC decides there is such a negative effect there’s the possibility that they introduce a new minimum tick for smaller companies of perhaps a nickel (up from a penny) to as much as a dime. I believe this would help the IPO industry, but many people disagree.
“It would be ironic that increasing the cost of trading small caps might actually improve their liquidity,”said my old friend Darrell Duffie, who teaches finance at the Stanford Graduate School of Business. “This is possible. If there is not enough of a floor of per-trade profit in providing market making services, then market making services will not be provided. Too much competition for low bid-ask spreads could drive out participation. If there is a floor, high enough, then each trade execution would be more expensive, but it will be easier to get execution, possibly promoting more liquidity on net. Note that some exchanges are subsidising order execution as a way of raising liquidity. But overall, I don’t think raising the minimum tick size will boost IPOs much. It might improve net liquidity for them at the margin, or it might not. But the major costs and benefits to going public are likely elsewhere, I am guessing. First, it is not as desirable these days to be a public firm. Think of Sarbanes Oxley. Secondly, the source pool, the VC world, is not as vibrant as it was, for a number of other reasons. Finally, the demand for risky assets is down. Volumes of trade of all types (even big stocks) is way down.”
Darrell, who is one of my heroes, is largely correct. Increasing tick sizes alone probably won’t be enough to create an IPO renaissance. Two more things are required: 1) more and braver risk capital, and; 2) real competition in the IPO space.
Crowd funding as described by the JOBS Act may well bring the required capital to bear, though with some significant limitations, namely the present $1 million limit on capital raised per year and the $2000 annual limit on crowd fund investments for unaccredited investors. But if even 10 million unaccredited investors became involved in crowd funding (less than 10 percent of American households) and invested an average of only half the $2000 limit, that would still be $10 billion per year, which is a heck of a lot of startups.
But the Wall Street pros don’t like crowd funding, seeing it as too little money to be worth the trouble. That may have a lot to do with the fact that Wall Street is so far running the game and of course objects to any changes that might threaten their leadership. In this case I think Wall Street could use a little competition, and following recent outsourcing trends I’d see that competition coming from China, specifically Hong Kong.
Finally we find a perfectly proper case for offshoring, in this case IPOs.
Why do American companies go public in America? Sometimes they don’t. When I started this gig in the 1980s a popular dodge for technology companies was to go public on the London Stock Exchange (LSE) because it was cheaper and easier and some of the capital and ownership rules were different.
I recall an e-mail exchange years ago with Borland International founder Philippe Kahn in which he claimed that Borland, as a public company, was prohibited by the SEC from lying in public statements. I pointed out to Philippe (who remains today among my Facebook friends) that his company traded only in London and therefore the SEC had nothing to do with it.
Like London in the 1980s, Hong Kong today has a robust retail investor market where the U.S., with its huge institutions, no longer does. You and I simply don’t matter to Wall Street, did you know that?
IPOs in Hong Kong are perhaps a third as expensive in terms of fees as they are in America. And for that matter IPOs are happening frequently over there and only infrequently here.
Hong Kong banks want to make business loans. There’s an intrinsic value placed on public companies in Hong Kong of about $30 million. That is, purely on the basis of being traded on the Hong Kong Stock exchange, a company is assumed to be worth $30 million more than if it wasn’t traded. And while such a premium may exist here as well, in Hong Kong companies can actually borrow money against that assumed equity. Standard Chartered or HSBC — banks that operate in the USA, too, and won’t loan a dime to entrepreneurs here — will lend up to $10 million to recent Hong Kong IPO companies even if they aren’t profitable.
Hong Kong feels for IPOs like Netscape, circa 1995.
So I’d like to see Hong Kong reach out to U.S. companies as the same kind of minor leagues of public trading that London was in the 1980s.
Bootstrapping to build a prototype, crowd funding to build a company, going public in Hong Kong to build production, then eventually coming back to NASDAQ or the NYSE as a larger cap company, that’s the food chain I envision for the next decade.
And it would work.
Now let’s see if the SEC will allow it.
Called it! Okay, while I was thinking about overseas, HK caught me by complete surprise. Awesome write up Bob.
Even if SEC would want to, there is nothing for them to neither approve, not forbid.
“Bootstrapping to build a prototype, crowd funding to build a company, going public in Hong Kong to build production,”
Actually it cannot work this way, because Hong Kong Stock Exchange has “tough enough” preconditions to any company willing to list there. The lowest type of listing is called GEM and requires at least 2 full years in existence, market capitalization at IPO time of at least US$13 million, positive cashflow of at least US$ 2.6 million for the last 2 years (aggregate).
That’s hardly a start-up anymore, and all this *before* going into production??
More info:
https://www.guidemehongkong.com/incorporation/topics/hong-kong-company-going-public-considerations
https://www.hkex.com.hk/eng/listing/listreq_pro/documents/e_hkex-gem-ch10.pdf
Businesses have to be sustainable, it’s true, but I’ve been active in Asia for 20+ years and am more involved in Hong Kong than ever. It’s a very attractive environment for viable companies. The rules you cite, for example, are guidelines, not rules. I’ve seen successful IPOs in Hong Kong that wouldn’t have qualified under your rulebook yet still they happened.
The Vancouver stock exchange has provided this kind of service for many years. I think it is now called the Canadian Venture Exchange, after a number of reorganizations.
It is largely considered the home of cons, scams and frauds.
Which is why I didn’t mention it. The Canadian mining sector, especially, is riddled with investor fraud. Buy the same token I didn’t mention Australia, either. Only the accent is different.
But why wouldn’t you expect the same result elsewhere? All the good intentions will follow the usual path if enough money gets involved to make it effective, I would think. I really don’t think the Canadian and Australian examples are the results of some kind of character flaws in Canadians and Australians. The VSE used to be much more than mining ventures – it had a large tech sector, especially during the dot-com boom.
I think your IBM columns bring another important perspective to this problem. Most people would not run THEIR company the way IBM is running its business. Why does IBM? Wall Street! Wall Street does not value firms in the same way most people would. Wall Street values only PERCEIVED shakers and movers. They want to see increasing growth, profits, revenue, each and every quarter. If a company has to destroy its reputation, upset its customer, sacrifice its future — that’s okay. In the end Wall Street does not care. Wall Street will make money on IBM while its stock goes up and when it comes down. Wall Street makes money selling IBM and IBM is perceived as a winner, it is easier to sell IBM.
In Wall Street’s eyes companies that are steady, profitable, and well run are boring. If they are not tearing up the market, they’re boring. Wall Street can’s sell them…
Only large companies can do what IBM is doing. Behind large companies is an enormous financial base and a lot of business momentum. When things turn bad it takes years for them to become apparent on the balance sheets. If a small or medium sized company were to do what IBM does, they could put themselves out of business quickly. They do not have the financial strength to cover the risks IBM is making.
If Wall Street only rewards perceived movers and shakers and only large companies can run themselves in a way that wins Wall Street’s favor, then that leaves out most small and medium businesses. The problem is Wall Street. Wall Street does not value well run businesses or small businesses with promising new ideas.
Maybe we need a different type of stock exchange. Imagine an exchange that is not based on the speculative value of the stock. Investors make money from the dividends. The number of shares and the value of the stock is based on tangible business metrics and when the business does well, its investors make a good ROI. In this exchange investments are used to create new business and profits go back to the investors. This is how the world needs to work for new, small, and medium sized companies. The problem is Wall Street no longer works this way.
Wall Street is the problem.
As an retail trader (trade my own money & not making a living at it) I have spent a lot of time looking listening to people who really do know what they are talking about related to the stock market. The way most professional traders look at the stock market quite differently than the average person. Money has been going into IBM (stock) since June 2006 with a minor dip in 2008. The charts tell me it is a pretty good time to go long (buy) and sell when it gets in the range of 215-220 (depending on the charts at that time). I have little respect for the company but don’t care about that when trading. I am not trading IBM and this is not a recommendation in any way to so.
I’ve been a retail trader for the last 10 years. In the last few years the high volume electronic trading systems have turned the stock market on its ears. There are many companies whose stock price should be climbing and it isn’t. Likewise there are companies whose stock is tearing up the market and the financial reports really don’t justify it. The smaller the company, the more pronounced it becomes. Today Wall Street clearly favors large, well hyped companies.
Yes, sort of like well-hyped products, services, and polititians in general are favored by people until they wise up. But as the old saying goes “there’s a sucker…”, so the advertising industry thrives. But on the bright side it sponsors most of my entertainment while giving me the option to ignore it.
Ive played off and on over the last 10 years. The growth in high frequency trading (HFT) is probably unsustainable. Watch the chart on this page, the video loop takes about 20 seconds. http://motherboard.vice.com/2012/8/7/this-is-what-wall-street-s-terrifying-robot-invasion-looks-like
That being said, I am trading options right now. Only play options on stocks that have lots of volume. And I make money at it. Not quite consistent yet but get a better than the average return most people do. HFT makes it a little harder to trade but I don’t feel I am at a disadvantage.
And how do you decide which and when to buy, sell, hold, or ignore?
That is a short question with a very long answer. Whole books and whole careers have been spent on it and everyone will give you a different answer.
In short, a concept called technical analysis is my key to trading. It is using mathematical functions to create charts that give you insight into the psychology of the market. You don’t need to know the math, software already do that for you.
Suggestions:
– Toni Turners books are a good start. Easy to understand BUT they are not really enough to trade without hurting yourself.
– Keep reading, lots of good books on Amazon on trading and technical analysis. Good resources online.
– My trading platform is ThinkOrSwim. It is free, awesome, incredibly powerful. The other resources, videos… from TDAmeritrade are also very good.
– Ignore the almost all news sources as far as understanding the stock market. The IGNORANT talking to the ignorant.
I have hereby commented on this post. Time immemorial shall remember this comment on this post, hark.
Verily!
[…] 2: So Cringely’s solution is have more IPOs in Hong Kong? That reminds me of the “let’s just let people get drugs from Canada” idea. It […]
And what about the model that our Investment Banks use for IPOs? I think that Bill Hambrecht came up with an option that was better for the company with the Dutch auction method.
I think the lack of criminal charges in the collapse of MF Global along with the disappearance of $1.2 billion in customer’s money is proof that Sarbanes-Oxley is dead.
[…] An IPO minor league in Hong Kong for startups ~ I, Cringely […]
A couple of random thoughts.
I don’t think the JOBS Act approach is going to provide enough capital. If a small investor can invest no more than $2000 in a crowd-funded investment, what’s the payoff for him? Let’s say he’s willing to throw down $20,000 on 10 companies that look promising. Maybe he gets extremely lucky and and one of those 10 turns out to be the next Apple (or, Salix Pharmaceuticals to randomly take a successful small cap ). In that case, maybe over many years he sees a 25-fold increase in his investment, which would be nice, but $50K is not going to change his lifestyle appreciably . And, what are the odds of spotting that budding company from all the others ? Since most small businesses fail, even if our small guy is a good stock picker, six or seven of the companies he invests in are going to go out of business, losing most if not all of his investment. The three or four that do well are going to take a long time do it. It seems like pretty long odds. Better to bet on an indexed mutual fund and hope that the stock market meets its historical average of 8 or 9% growth a year, which will double your money in a decade or so.
Second thought: being able to borrow, as in Hong Kong, on that intrinsic $30 million of value that a company is perceived to have just because they’re listed on the exchange – well that seems like a recipe for disaster on the order of America’s credit swap debacle. Or maybe more like Enron.
This is better. But some inventions and companies that failed.
Monsoon produced electrostatic PC speakers which won prizes I held off for a year and in that time they went bankrupt. Bankers and others made them fail. I still don’t have them boo hoo hoo.
Fairlight a great Oz company invented the stereo separation sound system that Dolby uses for PC computers. The dumb Ozzies share owners sold down the company to cents and Dolby bought the company for less than the royalties it had to pay Fairlight. Ha ha ha ha!
Both sucked into the blackness of big corporations blackholes.
So success is difficult. Which means people need money to invest that they feel they can lose.
And going Far East means failure at home and USA reduced to third world status.
Who has the money controls the roost. Just ask the World Bank and Thailand or Greece!
And finally there’s no BIG IDEA on the horizon to make the tills ring like railways, electricity, cars, radios TVs, VCRs, PCs or digital stuff of the past. Apples’s 15 years of stellar growth has ended now its steady as she goes, unless it goes into biology! Motivated Visionaries are hard to find.
Oh and the best car ‘the Goddess’ — AND STILL NOT SURPASSED 50 yrs LATER — and its manufacturer (run by engineers) went bankrupt because idiots did not like it. So success is difficult.
http://en.wikipedia.org/wiki/The_Goddess_of_1967
Marc Cuban believes he has the answer to solving America’s economic problems :entrepreneurs.
http://blogmaverick.com/2012/09/17/the-cure-to-our-economic-problems-2/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+blogmaverick%2FtyiP+%28blog+maverick%29
the problem with that – not enough are being encouraged or can get funding
[…] companies. If they make it big, they may come back for a second round in this country. Read An IPO minor league in Hong Kong for startups for the details and some additional facts on the JOBS Act. Companies cannot raise more than one […]
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