Opening Remarks: SEC Roundtable

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I was recently invited to speak at the Securities and Exchange Commission (SEC) Roundtable On Market Structure For Thinly-Traded Securities at the SEC’s headquarters in Washington, D.C. on April 23, 2018. The purpose of the event was to discuss the challenges faced by participants in the market for thinly-traded exchange-listed securities and potential improvements that might be considered to the market structure for these securities.

The other speakers on the panel were:

  • Steve Cavoli, Senior Vice President, Virtu Financial
  • Brian Fagen, Head of Execution Strategy, Deutsche Bank
  • Bryan Harkins, E.V.P. & Head of U.S. Markets, CboeBZX
  • Frank Hathaway, Chief Economist, Nasdaq
  • Ovi Montemayor, Managing Director, Financial Markets Services, TD Ameritrade
  • Ari Rubenstein, CEO, GTS Securities
  • Jason Vedder, Director of Global Trading & Operations, Driehaus Capital Management

My opening remarks are below.

“Good morning, my name is Adam Epstein.

In preparation for appearing here this morning, I spoke with quite a few CEOs, CFOs and board members of small-cap companies. They implored me to thank the Commission for holding this forum, and I join them. This issue couldn’t be more important to them, and it frankly couldn’t be more important to me. Thank you for inviting me to participate.

I’ve had a front-row seat to the impacts of small-cap trading illiquidity for the last 15 years, during which time the problem has unfortunately gotten discernibly worse.

SEC eventI’m the founder of Third Creek Advisors. Since 2010, my firm has provided a buy-side perspective to CEOs and boards of small-cap companies regarding the resolutely unique challenges those companies face on a daily basis, particularly with respect to capital markets, with respect to corporate finance, and with respect to corporate governance.

The buy-side perspective my firm shares with pre-IPO and small-cap companies arises out of my seven-year tenure, from 2003 to 2010, co-managing special situation hedge funds operated by Enable Capital Management in San Francisco. Enable’s hedge funds collectively invested hundreds of millions of dollars in more than 500 small-cap growth financings during my tenure.

From the perspective of an institutional investor, there is no doubt whatsoever, that for small-cap companies in this country, the ability to access capital, and the terms of those financings, are inextricably linked to trading volume.

Subsequent to the financial crisis, that link has become so pronounced that I would suggest that the most capital and the best terms are reserved not necessarily for the best companies in today’s small-cap equity capital markets, but rather for the most liquid companies.  And, unfortunately, the opposite… is also true.

From an issuer perspective, illiquidity is an austere, multi-faceted problem.

As a result of Third Creek Advisors’ work with dozens of exchange-listed, small-cap companies over the last eight years, I see the insidious nature of illiquidity… daily.

I use the word insidious, because small-cap trading illiquidity affects considerably more than capital formation.

  • Trading illiquidity gravely impacts a small-cap company’s ability to both garner and maintain equity research coverage.
  • Trading illiquidity gravely impacts mergers and acquisitions.
  • Trading illiquidity gravely impacts the ability of small-cap companies to hire great employees, and retain those employees.
  • It gravely impacts the ability of many small-cap companies to successfully interact with customers, with vendors, and with potential partners.
  • And, many CEOs and CFOs implored me to pass along that, trading illiquidity is also responsible for countless lost hours of productivity for small-cap CEOs and CFOs.

I join many others in observing that an enormous percentage of high-quality jobs and innovation arise out of the small-cap ecosystem in this country. Rampant small-cap trading illiquidity is a dynamic capital markets problem… true. But, rampant small-cap trading illiquidity also directly impacts how small-cap companies operate.

Consequently, small-cap trading illiquidity is necessarily impactful not just upon the small-cap ecosystem, but it affects the broader economic health of this country, and also jeopardizes America’s global standing as the most innovative nation.”

This post was originally published on LinkedIn Pulse.

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ADAM J. EPSTEIN

A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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