Grant Thornton’s ‘Why are IPOs in the ICU?’

Grant Thornton adviser’s David Weild and Edward Kim have recently published a paper entitled “Why are IPOs in the ICU”. There has been much written about the IPO drought, but this report goes the extra length by offering plausible scenarios to fix the situation:

The United States needs an opt-in (by the issuer) capital market that provides the same structure that served the United States in good stead for so many years. This market — let’s call it “The Second Market” — would be:

Opt-in – Issuers would determine whether they wished to list in this marketplace or the traditional market.

Public – Unlike the 144A market, this market would be open to all investors. Thus, brokerage accounts and equity research could be processed in the ordinary way, keeping costs under control and leveraging currently available infrastructure.

Regulated – The market would be subject to the same SEC regulations and enforcement as existing markets.

Quote driven – The market would be a telephone market11 supported by market makers or specialists much like the markets of a decade ago. These individuals would commit capital. They could not be disintermediated by electronic communication networks or ECNs, as ECNs would not interact with the book.

Quote increments at 10 and 20 cents – 10 cents for stocks under $5.00 per share; 20 cents for stocks $5.00 per share and greater. These increments could be reviewed annually by the market and the SEC.

Broker intermediated – Investors could not execute trades in this market electronically. To buy stock, an investor would need to call a brokerage firm up on the phone. Brokers would earn higher commission rates and have an incentive to get on the phone and present stocks to potential investors.

This structure would lead to investment in the types of investment banks that once supported the IPO market in this country (e.g., Alex. Brown & Sons, Hambrecht & Quist, L.F. Rothschild & Company, Montgomery Securities, Robertson Stephens, etc.). This in turn would trigger rejuvenation in investment activity and innovation.

Here’s the entire report can be read here:


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