Emerging Company Policy Deconstructed: Small Cap Liquidity Reform Act (H.R. 3448)

In a nutshell: This bill, sponsored by Reps. Sean Duffy (R-WI) and John Carney (D-DE), will spur capital formation by increasing liquidity for emerging growth companies, including biotech innovators, that trade on the public market.

Why you should care: Under current U.S. Securities and Exchange Commission (SEC) rules, all securities on the public market are priced in $0.01 increments. This minimum trading increment is known as the “tick size.” The switch to the standard tick size of a penny was enacted in 2000 in order to boost trading in large company stocks, but many smaller issuers have experienced the opposite effect.

The Small Cap Liquidity Reform Act institutes a pilot program that will allow small issuers to choose larger trading increments (either $0.05 or $0.10) in order to spur trading activity in their stock. Allowing an increased tick size will grant flexibility to growing companies and increase the liquidity and capital availability necessary for emerging biotech companies to be successful on the public market.

Bottom line: The Small Cap Liquidity Reform Act addresses the unique nature of the trading environment that small companies face as well as the high capital burden of biotech R&D. Allowing for tick size flexibility will increase the effectiveness of the public market as a capital formation tool and speed the development of cures and treatments.

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