The Under $300 Million Market Cap Class- Nasdaq and NYSE American

LawCast with Laura Anthony, Esq.

The Under $300 Million Market Cap Class- Nasdaq and NYSE American- Since most companies with less than a $300 million market cap are not included in any major indices nor receive widespread analyst coverage, there is less aggregated information on their board composition and governance practices. The IRRC Report examined 160 companies representing approximately 10% of this company class which are traded on U.S. stock exchanges. Seventy-three percent (73%) trade on the Nasdaq, and the balance are on the NYSE or NYSE American.

Of the 160 companies, three-quarters have been public for more than 5 years, illustrating that not all small public companies are early-stage growth companies. Only 14% of the companies were still led by their founder. Although the IRRC report didn’t address the reasons or meaning behind these numbers, I think it makes sense in the overall corporate ecosystem. Very few companies will successfully grow to large-cap entities, nor should they. High-growth models come with great risk and can often lead to a total business failure. For instance, a company that goes public with a $50 million market cap and then grows 10%-20% year over year would still be in the under $300 million market cap class after 5 years, but also will likely have strong infrastructure and internal controls and provide steady growth to its investors.

Furthermore, the majority of the companies are in industry sectors that lend themselves to either slow growth or have seen dramatic industry change over the last decade. Thirty percent (30%) of the companies were in the healthcare sector, which notoriously has a very long research and development, pre-revenue lifecycle. Finance companies comprised another 18%, which sector has transformed post-Dodd-Frank, which was enacted in 2010. Rounding out the industries were consumer goods and services (15%), energy and utilities (11%), basic industries and transportation (10%), capital goods (9%) and technology (7%).

More than half the companies went public in the first 10 years of their founding. Although private equity has become more readily available for some companies (technology companies in particular), postponing a public offering, in my experience smaller companies have more opportunity to access capital through public markets then private sources. In fact, I believe the benefits of public capital markets are even more pronounced for small companies because they tend to be more innovative than large companies and they account for a substantial percentage of the jobs created every year. Public markets give an opportunity for some recouping of early-stage investments, incentivize employees through stock options and grants, add economic exposure and, of course, enhance access to capital for continued growth.

I’m securities attorney Laura Anthony, Founding Partner of Anthony L.G. and producer of Lawcast. Should you have any questions about today’s topic please visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always encouraged.