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Assassination of the JOBS Act and the Extermination of the Emerging Growth Company Capital Markets

Traders Magazine Online News, November 15, 2018

David Lopez and Micah Eldred

For decades over-the-counter (OTC) securities have been the vehicles that have launched small companies and enabled them to be traded as venture stage public companies (penny stocks), in tandem bolstering small investors’ entry into the trading realm. As noted by Spartan Securities CEO Micah Eldred, several recognizable institutions started out on the OTC or were once traded as venture stage penny stocks:  It’s no secret that many of today’s great companies started out as venture stage companies.  People often forget that one of the largest public companies listed today, Warren Buffet’s Berkshire Hathaway, began its life as a public company trading OTC when Buffet “reverse merged” his insurance business with a failing textile business.  But, in more recent times, the OTC markets has also acted as a consistent feeder source for the larger exchanges, as smaller issuers who begin life on the OTC are able grow and to up-list, including 77 up-listings last year alone.  For example, Monster Beverage Corporation initially traded as penny stocks in 2002 and now sits at close to $52 per share, with a corporate valuation of $29 billion.1   

The Initial Public Offering (IPO) process a company follows as they prepare to offer shares is lengthy and quite costly. For small, growing companies with limited capital the traditional exchange listed IPO is out of reach. The alternative has been a smaller offering on a venture or OTC market, often traded with a value of $5 or less (penny stock). The stocks can be high-risk investments with low trading volumes, but also have a potential high reward.2   

In 2016 Elio Motors¾the maker of the 3-wheeled car¾became the first crowdfunded IPO. The founder, Paul Elio, chose OTC Markets over Nasdaq for reasons of lower cost, less cumbersome processing, and that OTC Markets ‘change the world.’ OTC Markets CEO Cromwell Coulson worries more about disclosures than about the risks of companies failing or investors losing money, noting that it should be a market with risks and rewards¾designed to give entrepreneurs a shot.3

The 2012 Jumpstart Our Business Startups (JOBS) Act was passed to alleviate a considerable number of the regulations instituted by the Securities and Exchange Commission (SEC) on small businesses¾and develop opportunities for raising capital. Its effects have helped facilitate lower level investments where ownership shares are sold directly by issuers to interested investors.

Despite the presence of the JOBS Act, the trend for initiating quotations for covered domestic equity securities in the OTC markets has experienced a 90% decline and has fallen from 1,576 in 1997 to only 120 in 2017.4 This runs contrary to the fact that the population is larger, the economy has grown, trading markets technology is better, unemployment is down to its lowest level since 1969.5  The supposed tsunami of new markets predicted by SEC Commissioner Luis Aguilar to be created by the JOBS Act has only been a ripple.6  

The legislative and executive branches of the U.S. government understood the need for entrepreneurship to flourish when they passed the JOBS Act. By allowing emerging growth companies with potentially innovative ideas to hit the ground running and seek capital from small individual investors—without the obstacle of strict regulatory requirements, they are fueling the economy. Spartan Securities fully supports SEC oversight and operates in full compliance of current regulations, in spite of increasing and changing regulations and sanctions.  

According to Eldred, “The SEC Commissioners appear to be all for “Main Street” investors, including those small “Main Street” companies who desire access to the USA’s capital markets, in their press releases and speeches but their enforcement division is simultaneously turning Main Street into cemetery grounds full of investors in shallow graves.”

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