15 Jul Small Cap Market Surging Back

It looks like the small cap market just finished its strongest half year since 2008. That’s good! According to The Deal, IPOs doubled, private investments in public equity (PIPEs) are up as are special purpose acquisition companies (SPACs), and additional public offerings by already public companies (follow-on offerings) rose over 40% in the second quarter compared to the prior year. It certainly helps that key market indices were up almost 3% for the quarter.

The amount raised in PIPEs in the second quarter is the most since 2008. Experts in the article (including your humble blogger) believe there’s still more upside and that the markets are not yet overvalued. The continuing challenge: liquidity. Most investors these days want it, so registered offerings giving them immediate ability to sell are by far the most popular. So smaller companies whose market values are below $75 million, and are not eligible for a short form of registration to complete a liquid offering, still struggle. They can raise money, but it is more difficult and comes more from large groups of individuals than funds or institutions. Maybe the regulators will consider allowing these smaller companies to utilize the short form. Maybe.

The reverse merger market is at roughly half of what it was at the height of things. This is mostly because the SEC imposed a requirement for post-reverse merger companies to trade in the over-the-counter markets for one full year before uplisting to Nasdaq or other higher exchanges. This put a skewer through many deals structured to complete a merger and PIPE followed by an immediate public offering right to the higher exchange. This all follows some real challenges following allegations of fraud in a number of Chinese companies that went public through reverse mergers leading up to 2010. But the market is still going at a pace for over 100 reverse mergers this year, and more of them are raising money when they complete their transaction. Energy and beverage companies in particular seem drawn to reverse mergers.

Go small cap!