JOBS Act Interview: Neal Wolkoff on Effects to the Public Markets

To better understand the purpose and need for passing the JOBS Act, it is important to know the challenges that small businesses have faced when seeking ways to fund their growth. After all, growing companies are the primary source for creating quality jobs for Americans. In previous interviews, we’ve discussed the JOBS Act in terms of legislative impact, new options for small companies, and structural issues regarding capital formation.

For this interview, Equities.com spoke with Neal Wolkoff, the former Chairman and CEO of the American Stock Exchange, COO of the New York Mercantile Exchange, CEO of ELX Futures, and currently Of Counsel with Richardson & Patel LLC. His wealth of experience in the financial markets dealing with issues regarding publicly traded companies and investors provides an insight to how the new rules in the JOBS Act may effect the capital markets.

EQ: What are some of the challenges that smaller, emerging companies face during critical periods of growth, and why is it important for the economy and investors to help nurture these companies during this time?

Wolkoff: They face all kinds of challenges, really. Many of the challenges are typical in business, but others are just about getting over whatever road blocks or impediments that are in the way for growing companies. One of the main purposes of securities laws has always been capital formation. There is, in some ways, a tension between that and investor protection. Right now, we’re seeing for the first time in a number of years the recognition that new small cap companies and new entrants to the public markets really need to be nurtured. Their ability to access the capital markets is critical for them to become established, and as we’ve seen over the last number of years, they are the job engine of the economy. So to a large extent, we’re seeing that without them in a robust state the kind impact it has on the economy and unemployment as well.

EQ: The impact of Sarbanes Oxley on small cap companies has been pretty alarming, and you’ve been vocal about the issues over the years. Does the new JOBS Act help to relieve these constraints?

Wolkoff: I think it does. There’s an effort to make it as much more friendly for the smaller companies to begin to raise capital without quite as much of the constraints that have been imposed on them. An example is that qualified companies can be granted a special title of “emerging growth company” in the JOBS Act. Sophisticated investors and certainly accredited investors are looking for new opportunities that are different and special, and that predict the next great technology or the next innovation that’s going to transform everyday life. That typically comes from newer companies. It’s generally not coming from companies that are perhaps 50 or 70 years old that do great work and great business. But the engine of innovation and job creation truly comes from the small companies. When I was at the American Stock Exchange, we tried our best to be as accommodating and helpful as possible. I see my role now as continuing that and focusing on helping small companies navigate the regulatory waters, so to speak, and doing what they do best, which is innovating.

EQ: The collapse of the small cap market and businesses entering the public markets could be traced back to over a decade ago with the adoption of decimalization, if not further. How has that impacted the market?

Wolkoff: In a lot of ways, when the market went to decimalization, it proved to be very pro-competitive and favorable to investors. The one exception to that was the smaller companies that were really just coming into the capital markets and becoming tradable entities. They found that decimalization made it difficult to build the kind of liquidity from market makers, especially, that would attract investors. It made it challenging for small companies to give people the confidence that they could buy the stock, and when they were ready, could sell the stock and it was going to be a simple and cost effective thing to do.

What decimalization does, in the case of a stock that hasn’t yet found an audience to make it liquid from just investors is it takes away a lot of the profitability, and thus, the incentive for professional market making firms to pay attention to that particular stock. Market makers work on the profits they can earn through a bid-ask spread. Since decimalization narrowed the bid ask spread to a single penny, then the profitability is simply not there and the risk is greater than the amount of money that a firm can earn. I’m very much hoping that becomes a matter that’s certainly studied but also meant to be acted upon.

I believe that the executives at the New York Stock Exchange are in favor of providing some relief for small companies and I think that it’s vitally important to have them build an audience in the investing public. To do that, it really does require the participation of market makers who need to be able to protect themselves against the risk they face and to have a reasonable profit for providing market making services that they do.

EQ: There has been a real effort made toward building transparency and awareness of the small cap market in recent years. How has the small cap market evolved over the past decade in terms of structure, transparency and building investor confidence?

Wolkoff: I’ve always been a fan of creating structure around the small cap market. To a large extent, for example, the Pink Sheets and smaller markets like that aggregate under an umbrella of The OTC Markets Group. So having a set of rules and having transparency, oversight and trading rules is all very helpful. Obviously, I’m not in favor of doing away with rules entirely and having a wild west because you need rules like transparency and simple disclosure. There’s been more of an opportunity for that and I think that as the JOBS Act gets more familiar to people and becomes more in place, it will also promote transparency and promote more research on small cap companies. All of that is good because it gives the investor more confidence in dealing in a security because there’s more information and there’s more structure.

EQ: While the JOBS Act was signed in early April, a lot of the key aspects of the law are still in the process of being implemented. What do you believe are the next steps in terms of creating awareness and educating people on the new laws?

Wolkoff: I think it’s just the beginning at this point. There’s a lot in it and it needs to be digested and companies still need to understand what’s available to them. It’s a good time and a great opportunity for smaller companies in need of new possibilities as far as getting into the public market, raising money and dealing with all of that in a simplified way.

EQ: Part of that is increasing dialogue and discussions with those heavily involved from both those on the regulatory and industry sides. As one of the esteemed panelists in the upcoming webcast on the JOBS Act, how do you feel this will help that effort?

Wolkoff: Well, we’re going to have Congressman David Schweikert, who’s really been a leader in promoting the JOBS Act, and simplifying things to help create opportunities for small cap companies. My role, along with the other panelists, is going to be explaining some of the opportunities and talking about some of the market structure issues that we’re hoping become subject matter for further discussions but also to become decisions in the future.

For more on the JOBS Act, be sure to visit Equities.com’s JOBS Act Section: