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. Last Updated: 07/27/2016

Small Is Beautiful but Risky

LOS ANGELES -- You can easily buy stock in giant Microsoft Corp. or in Anheuser-Busch Cos. So why not in your neighbor's fledgling software company or in a local microbrewery?


Or for that matter, why not in the corner dry cleaner?


As Wall Street's bull market surges ahead, small-company stocks have emerged as the new stars. The public's hunger for them is so intense that a record number of companies -- most of them relatively young -- have been able to "go public" so far in 1996, selling shares to investors for the first time.


Now federal and state regulators, embracing the Republican Congress' pro-small-business attitude, are rushing to make it simpler for even the tiniest companies to solicit investors.


Yet even those who support liberalizing stock-offering rules for small companies worry that the idea will have disastrous consequences if too many individual investors clamor to buy shares of untested companies -- perhaps over the burgeoning Internet -- only to see those stocks collapse in the next big market downturn.


Others, however, contend that such worries are overblown, that individual investors are unlikely to sink much of their savings into such stocks, and that whatever the risks, the higher long-run cost to the U.S. economy would be in hindering legitimate entrepreneurs from getting the capital they need.


"If we just make these stocks unavailable, then we're for sure protecting the public" from potential loss, said Debra Bortner, securities administrator for the state of Washington. "But I don't think we can do that anymore. We live in an age where small businesses are creating a lot of jobs" and thus feel that they have a greater right to funding, she noted.


Among the efforts to ease restrictions, eight Western states recently began a program to reduce paperwork for small companies that want to offer shares across state lines. Under the program, an offering approved in one of the states will be approved in all of them. At the federal level, the Securities and Exchange Commission has a number of initiatives under way to remove roadblocks for small-share issues.


Yet even as regulators focus on greasing the money wheel for smaller companies, the most important stock market for those firms, the electronic Nasdaq Stock Market, may soon find itself in the ironic position of making it more difficult, rather than less, for smaller companies to get or keep a coveted Nasdaq trading slot for their shares. The National Association of Securities Dealers announced in May that the self-policing organization of the U.S. securities industry will study raising its standards for Nasdaq listings for the first time since 1992.


While the New York Stock Exchange is still considered the premier U.S. stock market, the electronic Nasdaq market -- where brokerages trade shares over computers or over the phone -- is "home" to the majority of stocks, including many of the country's leading technology firms, such as Microsoft and Intel Corp. A Nasdaq listing assures a small company that its stock can appear on brokerage computer screens, online computer services and newspapers nationwide.


In short, a Nasdaq listing means a company has exposure to investors, and its shares trade in real time on the Nasdaq network.


Below the official Nasdaq market is the OTC Bulletin Board. Although operated by Nasdaq, the Bulletin Board doesn't allow for the same instantaneous trading as the Nasdaq market. Hence, many of the 5,500 Bulletin Board stocks are rarely traded.


Many brokers and money managers, either by choice or by company policy, simply don't deal in Bulletin Board stocks.


On the Bulletin Board market and rungs below it, "we have a real [regulatory] black hole," said Debra Bollinger, director of the South Dakota division of securities. Neither the SEC, the NASD nor the states have the resources to adequately monitor those thousands of stocks, she said.


Yet that is exactly where most of the small stocks that federal and state regulators are under greatest pressure to accommodate would wind up. Many such stocks, in fact, would not officially "trade" at all and would have no daily pricing mechanism, even though they could have hundreds of shareholders.