3rd in a series explaining how Dodd Frank crushed the ability of small cap companies to raise capital
Previous articles, http://microcapstrategies.com/2018/04/04/dodd-frank-negative-impact-on-company-capital-raising/, have illuminated the following truths relating to raising capital for publicly-held, nano-cap and microcap companies:
- “Personal Loans/Credit” of Founders and “Friends & Family” provide the preponderance of capital for these class of companies.
- As these capital sources become “tapped” out, publicly-held, start-up/emerging companies need to attract “investment firm” capital to survive.
- Dodd-Frank has crushed valuations for these publicly-held, micro-cap and nano-cap companies.
This post illuminates that the crushing of these valuations by Dodd-Frank has virtually killed their stock trading liquidity (i.e., number of shares traded daily through the public markets).
This in turn has created a downward “death” spiral for many publicly-held, nano-cap & microcap company stocks as explained below:
- If the value of an asset class has been crushed — as DF has done to publicly-held nano-cap and microcap companies shares — relative to alternative asset classes, there is less demand for that asset class
- Less demand results in a lower trading volume
- Lower trading volume results in a lower price (Economics 101: law of supply/demand)
- Lower price results in lower trading volume, which results in lower price, which results in a lower trading volume, etc. as the cycle repeats
- A vicious “downward spiral” ensues in both stock price and trading volume
A subsequent article will explain why family office and other investment firm capital is loath to invest in public companies whose stock prices are declining and that have low liquidity.