Forbes Finance Council

In today’s capital markets landscape, the initial public offering market is experiencing significant challenges, especially for microcap companies seeking to meet certain minimum initial listing requirements on the Nasdaq. However, one innovative approach that has gained traction is the reemergence of including existing shareholders in microcap IPO transactions.

This strategic move allows companies to raise less capital, which means less dilution at potentially depressed valuations on the initial listing, all while meeting the stringent listing prerequisites.

The Changing IPO Landscape

Historically, IPOs have been the go-to method for emerging companies to raise substantial capital, while also providing liquidity to their existing shareholders. However, in recent years, the IPO market has become increasingly challenging for microcap companies. Stricter listing requirements, heightened scrutiny from regulatory bodies and investor demand for stronger balance sheets have made it harder for smaller companies to complete a successful IPO.

To be able to list their securities on the Nasdaq or the New York Stock Exchange, companies must generally have at least $15 million worth of their shares held by public shareholders. This is often referred to as the “public float” requirement. Traditionally, companies completing microcap IPOs aimed to satisfy the public float requirement by simply completing a $15 million IPO. For microcap companies, however, raising sufficient capital to meet the public float requirement has recently become a more daunting task.

The market for microcap IPOs is also more selective today than it was in 2021 and 2022. In 2021, the median offering size for a microcap IPO was $25 million, based on our analysis of Nasdaq data. In 2022, the median offering size was down to exactly $15 million, and so far in 2023 it is down to $8 million.

Okay, we didn’t get to ring the bell, but we’re still public!

In such market conditions, the traditional practice of completing a $15 million IPO to satisfy the public float requirement just won’t do. The number of microcap issuers who were able to raise at least $15 million in their IPO went down from 90 issuers (83%) in 2021, to 42 issuers (59%) in 2022, and only 12 issuers (25%) so far in 2023.

To overcome some of these challenges, including smaller deal sizes and lower valuations, microcap companies are reevaluating their IPO strategies and turning to the involvement of selling shareholders to meet the public float requirement. Selling shareholders refers to existing private investors or stakeholders who the issuer and its investment bankers are willing to register in the company’s S-1 registration statement so their shares would be freely tradeable upon the IPO thus counting toward the $15 million public float requirement.

However, this strategy is not without challenges. Sometimes investment bankers and new IPO investors, especially anchor investors, don’t prefer selling shareholders being registered because oftentimes their cost basis is below the IPO price, which could lead to lots of selling on the first day when liquidity may not be so great.

Read the full article on Forbes.

So funny, as most of us us know the real reason for not letting pre-IPO investors hit the bid, day one.