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.
The BullsNBears.com website was founded by market crash expert Michael Markowski to specialize at publishing articles by him and by other authors who have been screened. The articles pertain to market crashes, market bottoms and recessions and depressions. Register below to be alerted when a new article is published on BullsNBears.com.