The SEC Office of the Advocate for Small Business Capital Formation has released its Annual Report for Fiscal Year 2024, shedding light on the current state of initial public offerings (IPOs) and the challenges faced by small public companies in the U.S. This report provides valuable insights into IPO trends, the impact of venture capital, and the dynamics affecting companies going public. Here, we summarize the key findings and trends highlighted in the report.
Trends in IPO Activity
The IPO landscape has seen significant fluctuations over the past few years, with a peak of IPO activity (notably, approximately two-thirds of 2021 IPOs were conducted by special purpose acquisition companies, or SPACs) seen in 2021. The first half of 2024 witnessed a slight uptick in IPO activity but remained significantly below this peak with a marked reduction in SPAC IPOs. The report notes that the total IPO proceeds and the number of IPOs have varied considerably:
Despite the decline, certain industries have been more successful in raising capital through IPOs. The top sectors include technology, manufacturing, business services, banking and financial services, healthcare and hospitality.
The Role of Venture Capital
Venture capital (VC) continues to play a crucial role in the IPO market. In 2023, 43% of IPOs were VC-backed, up from 37% in 2022 but down from 56% in 2021. The availability of VC funding has allowed companies to stay private longer, contributing to the reduced IPO volume. Additionally, VC involvement post-IPO is linked to higher valuations and returns, with 40% of VCs remaining invested in a portfolio company for more than three years post-IPO.
Challenges for Small Public Companies
Small public companies face unique challenges in the public market. Since 2022, IPOs by small companies have accounted for 40% of the number of IPOs but only 4% of the deal value. These companies often struggle post-IPO, with many trading down while the aggregate value of large public companies has grown. Key challenges faced by small public companies include:
- Market Performance: Small-cap companies often see less investor interest and higher volatility. In 2023, 22% of small-cap companies were on an exchange non-compliance list and 42% executed reverse splits.
- Analyst Coverage: Limited research coverage exacerbates the challenges faced by small-cap companies. The report highlights that 44% of small- and mid-cap stocks have no analyst coverage, compared to only 3% of large-cap stocks.
- Regulatory Costs: Regulatory costs and compliance requirements can be burdensome for small public companies with limited resources. The report notes that small public companies incur significant annual costs for enhanced disclosure, SOX 404 compliance, and governance.
The U.S. Listing Gap
The overall decline in U.S. exchange-listed companies, often referred to as the U.S. listing gap, is driven by several factors, including mergers and acquisitions (M&A), regulatory costs, and private equity. M&A activity, in particular, provides a viable and cost-effective exit strategy for entrepreneurs and early-stage investors, often leading to the acquisition of private companies before they are ready to go public.
Capital Raising by Small Public Companies
Despite the challenges, small public companies continue to seek capital through registered equity offerings. In the 12 months ending June 30, 2024, only 13% of small public companies have raised capital through such offerings. The average proceeds from these offerings have varied, with small public companies in the healthcare, business services and technology sectors raising the most capital.
Conclusion
While the IPO landscape has seen fluctuations, certain industries continue to thrive, and venture capital remains a critical factor in the market. However, small public companies face significant challenges, including market performance, limited analyst coverage, and regulatory costs. Among the key policy recommendations OASB made to Congress and the SEC is to make the public markets an attractive goal by regularly evaluating and scaling the rules that affect small public companies and considering ways to enhance their liquidity and visibility. As we look ahead to 2025, we will continue to monitor the progress of these policy recommendations and their impact on the capital markets for small public companies.
