4th in a series explaining how DF crushed the ability of small cap companies to raise capital
Previous articles appearing at http://microcapstrategies.com/2018/04/04/dodd-frank-negative-impact-on-company-capital-raising/ and http://microcapstrategies.com/2018/04/17/downward-dodd-death-of-microcap-stocks/ 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 types of companies.
- As these capital sources become “tapped” out, publicly-held, start-up/emerging companies need to attract capital from investment firms, such as family office/institutional investors, to survive.
- Dodd-Frank has crushed the stock valuations for many of these companies.
- These crushed stock valuations have killed their stock trading volumes (“liquidity”) and created a vicious downward “death” spiral.
This article explains why Dodd-Frank’s killing of stock trading volumes has made it virtually impossible for many publicly-held nano-cap and microcap companies to raise capital from investment firms.
See below for the explanation as to why stock trading volumes/liquidity is key to obtaining investment firm capital.
A “typical” investment firm generally considers the following factors as it evaluates potential investment candidates:
- the amount invested has to be sizeable enough to “matter” to the investment firm
- let’s assume $2MM is to be invested by the investment firm
- the firm seeks to complete its investment within 1 month (20 trading days)
- $2MM to be invested, divided by 20 trading days = $100,000 per day invested
- the firm typically does not want its stock purchases to drive up the stock trading price, so it typically seeks to limit its purchases to < 10 – 15% of daily trading volume
- To invest $100,000 per day within the 10 – 15% parameter means there must be a daily trading volume of between $6667000 – $1MM
- Companies WITHOUT the requisite trading volume will NOT receive investments from these investment firms
In conclusion, following the enactment of DF a smaller percentage of publicly-held microcap and nano-cap companies have the requisite trading volume, which has resulted in them being deprived of investment capital.