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However, stricter listing requirements, heightened regulatory scrutiny, and investor demand for stronger balance sheets have made it increasingly difficult for these companies to raise sufficient capital in recent years. The market for microcap IPOs has also become more selective, with median offering sizes and valuations dropping significantly since 2021.
The median offering size fell from $25 million in 2021 to just $8 million in 2023. Simultaneously, the number of microcap issuers who were able to raise at least $15 million in their IPO decreased from 90 (83%) in 2021 to only 12 (25%) so far in 2023. The average public offering price also saw a 30% decline since 2021.
In response to these challenges, microcap companies are turning to existing private investors or stakeholders, known as selling shareholders. This strategy involves registering selling shareholders in the company’s S-1 registration statement so that their shares can be freely traded upon the IPO and count towards meeting the public float requirement.
This approach has seen a significant rise in popularity. In 2021, only 10 issuers (9.2%) registered shares held by selling shareholders in the IPO. However, by 2023, this figure had risen to 17 issuers (28%). In fact, selling shareholders accounted for 24% of the post-IPO public float of such issuers so far this year.
The benefits of this strategy include the ability to meet listing requirements, less dilution at depressed valuations, and providing early liquidity for legacy shareholders. However, there are also challenges. For instance, investment bankers and new IPO investors may not favor selling shareholders being registered due to their cost basis often being below the IPO price, which could lead to significant selling on the first day of trading. Additionally, Nasdaq may require extra vetting of the IPO allocation book, potentially delaying the offering.
In conclusion, microcap companies are adapting their strategies in response to a challenging IPO market by including selling shareholders in their IPOs. This approach offers an effective solution to meet minimum listing requirements while raising smaller yet sufficient amounts of capital.
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