The SEC has now released its study, required by the Jumpstart our Business Startups (JOBS) Act, on whether tick sizes (the minimum allowed spread between bid and ask prices in trading) should be increased from the current one cent. They recommended not to increase tick sizes.
Many have argued that "decimalization" of tick sizes from 12-1/2 cents down to one cent in 2001 is a major cause of the dramatic reduction in small company IPOs, and IPOs in general. Others believe this was one of a number of causes, including the 1997 Order Handling Rules and computerized trading, which seems to favor large cap stocks.
But decimalization also made it harder for underwriters to pay for analyst coverage and compensate others assisting in helping obtain liquidity in smaller company stocks. This resulted in lower interest in these stocks since no analyst coverage was available.
Why did the SEC make this recommendation? They feel there were other factors affecting the IPO market. Spreads can still be higher than $0.01 but were dropping anyway. There is only limited empirical evidence of the impact of decimalization to work from. There might be "other significant negative or unintended consequences" if they increase minimum tick size. But they left the door open to further study, including suggesting organizing a roundtable.
I was quoted in this week's DealFlow Report expressing my disappointment in this result, especially given that there was no mention of any specific potential problems that could occur with just experimenting with an increase.
For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog by David N. Feldman, Esq., Partner of Richardson & Patel LLP.
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