Private companies often have aspirations of going public in order to grow and provide liquidity for early investors. However, this process comes with increased regulation and costs. A recent blog post by OTC Markets highlighted the dangers of small companies being pushed to go public before they are ready by investment bankers and advisors who may not have their best interests in mind.
The blog post, written by OTC Markets director Jason Paltrowitz, stated that many small companies fall victim to short-sighted intentions and a lack of long-term strategy. A study conducted by OTC Markets found that the majority of IPOs listed on NASDAQ CM and NYSE AMEX delivered a negative return from their offering price once they became public. Additionally, a significant number of companies appeared on non-compliance lists post-IPO, completed reverse splits, and included banker warrants that could lead to more dilution for shareholders.
Paltrowitz criticized the small IPO advisor sector for pushing companies to list on exchanges too early, which can harm existing shareholders. He described these advisors as a small group of conflicted investment banks, lawyers, and advisors who are focused on financial transactions rather than the best interests of the companies they advise.
Paltrowitz emphasized that the issue is not about companies going public, but rather about going public on an exchange too soon. He highlighted that many companies below $500 million market cap fail to attract institutional investors that would justify the costs of being on an exchange. He urged regulators to examine the practices of exchanges and the advisors pushing companies to go public.
In conclusion, Paltrowitz warned that predatory bankers are encouraging unsophisticated CEOs to list on exchanges, only to place shares with unregistered intermediaries who flip the stock and dilute founding investors. He compared this situation to the Stratton Oakmont scandal of the 90s, where IPOs listed on NASDAQ empowered fraud. He suggested that similar risks exist today and need to be addressed by regulators.
Overall, Paltrowitz’s blog post serves as a cautionary tale for small companies considering going public and highlights the importance of careful consideration and long-term strategy in the decision.
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