The BX Venture Market – Can the Market for Small IPOs Make a Comeback?

Nasdaq’s bid for NYSE Euronext didn’t exactly go according to plan, but perhaps they’ll have better luck at the other end of the listing market.

Earlier this month the Securities and Exchange Commission approved a proposed Nasdaq OMX BX, Inc. rule change to create a new listing market–the BX Venture Market–which is expected to begin operating this year.

The BX Venture Market will target smaller companies seeking their first exchange listing, whether as part of an initial public offering or as a progression from the over-the-counter markets, as well as companies that are being delisted from other national securities exchanges for having failed to maintain the requisite quantitative listing requirements.

The rule release notes that the BX Venture Market “will provide an opportunity for smaller, private, venture-backed companies to expand capital financing opportunities and go public, and at the same time, encourage investment in early-stage companies by providing private equity and venture funds with an exit strategy.”

There’s been quite a bit of commentary lately (or once again, depending on how you look at it) regarding the dearth of smaller company IPOs and the impact of private secondary markets, like  SecondMarket or SharesPost, on a company’s determination to go public.  What’s more, the Commission is in the process of reviewing how its current rules and regulations impact capital formation and if regulatory burdens can be reduced for small businesses while still maintaining investor protections.

So what do you think, can the addition of the BX Venture Market help spur demand for the smaller company IPO? The compliance costs associated with Sarbanes-Oxley, an often-cited contributor to the lack of small IPOs, have, at worst, leveled-off. Social IR, though still in a nascent stage for smaller companies, may be able to fill in some of the research analyst void. And the BX Venture Market is a national securities exchange, so institutional as well as retail investors, will be able to participate.

Listing Requirements

To be eligible for listing on the BX Venture Market a company will have to meet certain qualitative and quantitative listing requirements designed to ensure sufficient levels of investor protection and market activity, but with the smaller or transitioning company in mind.

Qualitative Listing Requirements

Qualitatively, a company must, among other things:

• be registered under Section 12(b) of the Exchange Act and current in its reporting requirements;

• adopt a code of conduct;

• have 3 independent directors and a fully independent audit committee; and

• hold an annual shareholders’ meeting.

Quantitative Listing Requirements

A couple of other noteworthy characteristics of the BX Venture Market:

• listed shares will not be NMS securities or blue sky exempt;

• shareholder approval will be required for certain equity compensation arrangements but not for other share issuances (i.e., no 20% rule; although a company will have to provide notice of any 5% change in the number of its outstanding shares); and

• if a company can meet the quantitative requirements of Nasdaq it will not be eligible to list on the BX Venture Market (read: sorry, no regulatory arbitrage opportunities here).