The microcap explosion
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Pushkin.

When we talk about stock markets, and over here on the Unhedged podcast we do that a lot, we tend to focus on a tiny handful of massive companies. We are guilty as charged in that regard. But there's a good reason for that, which is that plenty of US companies are bigger on their own than the entire FTSE 100 index of UK stocks, for example. Apple is one of them. But what about the tiddlers?

Today on the show, that's what we're going to talk about. Eeny weeny companies that are suddenly rushing onto US stock markets. Welcome to Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London. Joining me down the line from New York City, we have George Steer from the markets team. George, hello. Hello, Katie. How are you? We used to work together in London. Do you miss me terribly? Every day.

Every day. That's the correct answer. And we also have from New York City, Aidan Reiter from the Unhedged newsletter. Aidan, I gather you are a little horse, like a Shetland pony. Yes. I was at my college reunion over the weekend and I spent too much time shouting over really loud music, asking people, so what have you been up to for the last five years? Yes. Good stuff. As long as you were having fun. So, George, you're out there in New York.

Why, oh why, are you wasting the FT's time writing about tiny companies when you could be writing about big, important ones? Like, what's going on here? Why is there a rush? For the record, I do. I have written a few times about some big companies. But the small companies are far more fun, in my opinion. They're far more volatile. They're illiquid. And they tend to have made it onto the US stock market thanks to some interesting banks that we normally don't cover.

So, yeah, the traditional large cap IPO market has been quite quiet since I arrived because of tariff stuff, mostly. The small cap IPO market, on the other hand, is booming. So, IPOs for the uninitiated are initial public offerings, which is when a company lists on a stock exchange for the first time. And these are like big moments for markets. They're big moments for the companies. It's like, woohoo, you made it. You're on a big stock exchange. But a lot of these things... You get to ring a bell.

What could be better? It's really fun. But some of these companies are pretty teeny weeny and they do quite weird things. Yes. So we wrote a few weeks ago about microcaps, microcap stocks, which we define as any company that has listed in the US and raised less than $50 million in the process. Five zero. Five zero. Five zero. Yeah.

And yet the market for these kinds of companies, these listings is going gangbusters. We've had 42 small offerings in the last three months of 2024 and there were 41 in the first quarter of this year. That's the two busiest quarters in records back 15 years for the small cap or micro cap IPO market. That is double weird because bankers that I speak to say that, you know, for big companies, the market has just slammed shut.

There's a tiny trickle of big companies that are listing on the stock market, which is very much not what people had expected. People thought this was going to be a runaway, super-sore-away great year for companies listing because it was going to be a great year for markets. That has not worked out at all. There's a whole different set of issues that come with that. So why? Why do we have all of these tiddlers?

A few reasons, I think. The first is that NASDAQ tightened its rules around which kinds of companies can list on its exchange. So the other day, they enacted a ruling that means that companies have to raise at least $15 million when they IPO. So knowing that this rule was coming, a lot of the smallest companies rushed to get in ahead of time. So there was a rush to

They began last quarter of last year, but it hasn't really slowed since the ruling came into effect. Obviously, the companies that would have raised less than $15 million have slowed.

dried up, but there have been plenty of deals, I think at least 15 since mid-April, involving companies that have raised between $15 million and $50 million. So the rush wasn't just companies that didn't think they'd hit the threshold. It was just like everybody went for the door just in case. I think so. I think so. And I think another reason why the small cap market has been doing relatively well compared with the large cap IPO market is because

these sorts of listings attract different sorts of investors. Small caps attract retail punters. The punters do love a bit of this, but also it's quite important to know where these companies come from, right? They're not little kind of mom and pop apple pie stores from, you know, rural Wisconsin. They are predominantly from China and Hong Kong, right? Indeed, indeed. But a lot of these companies are just small selling noodles or

Clothes or... The range of companies is really, really broad. Are you saying that when I lived in China and there was a little doodle store on the corner, they could just IPO in the US? That's exactly what I'm saying. NASDAQ is populated by stocks like that. And a lot of them are from China and Hong Kong, yeah. China and Hong Kong actually dominate this microcap IPO market. There are Japan, South Korea, Singapore also...

account for a small chunk, but outside of the US, it's China and Hong Kong that provide the bulk of these listings. So these are like small manufacturing firms, noodle restaurant chains, little companies. And why are they going to US markets and not to Chinese or Japanese markets? I guess for the same reason that a lot of UK-based companies come to the US, right? They want access to deeper, more liquid capital markets. US investors just like to spend cash in a way that...

that other investors elsewhere do not. They're willing to take a punt on that hotpot chain that might not have done so well had it listed in Beijing. How do they even get to hear about these tiny hotpot chains? I mean, you know, is there a whole scene of promoting these stocks to retail investors in the States? Well, a lot of these companies use the same kind of cluster of US underwriters to go public.

How these underwriters source these companies is a really good question and one that I haven't quite got to the bottom of yet. They'll have offices in Beijing and they'll have people in Beijing that scour the country for

I guess. But the rate at which they do so, the rate at which these underwriters, most of which are based in New York, find companies scattered all across China to list here is pretty impressive. They're on the march. And NASDAQ is more than willing, more than happy to list these companies. I get to understand these companies mostly don't perform very well on the market. What's in it for these underwriters to go hustle into China and try to find that one noodle shop that they could take public?

I guess in a word, it's fees. They make money every time they list these companies. And it would be harsh to say they don't care how these companies perform. I'm sure they would all say that they do care how these companies perform after the IPO. But

financially they've made their money once the company goes public and the subsequent share price action is nothing to do with them is what they might say and they're not all disasters right no some of them do incredibly well shares in this uh esg data company diginex are up more than 1000 since the company listed in january it got a little help along the way from a

a big $300 million investment from a UAE, a minor UAE royal. I have to say that's so interesting that an ESG company, which is definitely not in vogue right now, from Hong Kong would be doing gangbusters on the US stock market. Also, I find it interesting that a UAE royal who certainly has his money from oil is now investing in this ESG company. Yes. None of it makes...

Who knew that environmental-based investing was such big news for Middle East royals? Maybe he's diversifying. Exactly, diversifying. It all just feels kind of strange, right? So US stock markets are like, they're very prestigious. They kind of drive the boss for the rest of global markets.

How has it come to pass that we've just got all these like tiny companies that do like quite an odd mix of things ending up on this sort of high stakes stock market? It just feels like something odd is going on.

Well, Nasdaq is a profit-driven company that makes money every single time a company lists on its exchange. So it's in its own interest to have as many IPOs as possible. It's also quite proud of having beaten the New York Stock Exchange in terms of how many listings it gets every year. So you can see why Nasdaq might want to list this stuff, these small Chinese Hong Kong-based companies, even if they do end up trading in

weird and wonderful ways. Can we go back to the moment when Katie called Americans prestigious bus drivers? The nice, the shiniest buses. Yes, exactly. But let's also rewind a little bit to the kind of broader story around US investing in China and sort of financial links between these two superpowers. Because like Aidan, like these countries are not

the best of friends in financial markets, are they? No, they are not. I mean, historically in financial markets, they got along swimmingly, right? People were super excited to invest in China back in the mid-2000s, mid-2010s. Chinese companies have generally been very excited to invest in the U.S. And the Chinese government holds a lot, a lot, a lot of U.S. treasuries. So, I mean, the financial systems are inherently intertwined. But at this current moment, we don't really know what the direction of this is going to be going forward.

Just, what, is it two weeks ago, we got the first detente, right, between the U.S. and China since Trump started ratcheting up trade tensions. So now tariffs are around 30%, and they could go lower. We don't know. They also could go higher. So it's kind of unclear what the direction is. But there are rumors in Washington and elsewhere that there could be more steps taken, especially to stop Chinese investment in the U.S. Interesting.

Interesting. Now, George, this isn't the first time you've written about all this stuff, is it? You've done quite a lot of deep work in the past into where these really massive moves in really tiny stocks come from and how people make and lose large amounts of money through it. Some of that sounds like slightly the dark side of all this. Yeah, well, I think US stock markets have had a problem with very volatile markets

Chinese microcaps in particular for a very long time, going back to the mid-naughties. There was a film made about this called Boiler Room, which I'd encourage everyone to watch. The problem kind of died down after 2010, after markets cooled, but then came back in 2015, died down again, then reared its head again in the weird pandemic era bull market we had in 2021.

That was a weird one. Yeah, it was a weird one. It was a weird one. At the time, there were hundreds of IPOs going on. The capital markets were incredibly busy and a whole host of small Chinese companies were IPOing again on Nasdaq, which is where most companies tend to. It's the most popular venue.

But there was a very obvious pattern emerged that drew the interest of a lot of investors who put me onto the story about Chinese companies IPOing and their shares surging by billions.

stupid numbers on their market debut, some thousands of percent, only to crash by 98%, 99%, sometimes the following day. So this clearly looked weird. What's going on? That's not normal price action. Stocks should not behave like that. So yeah, during 2021, 2022, when I was reporting for Alphaville in London, I wrote a few articles about some of these strange things

price moves involving small Chinese stocks and recognized that there are a few common denominators, a few underwriters, most of them based in New York, were behind a lot of these IPOs. They were the underwriters on these IPOs, which means they market the shares to investors. And it turned out that when I reported the story that we're talking about today, a lot of those same underwriters responsible for some of the strange IPOs during the pandemic bull market

are just as active today, although there's a few new players involved and perhaps we can talk about some of them because two of the most active underwriters are based, one of them is in Trump Tower.

The other is in the Trump building. Oh. That was going to be my next question. There is, of course, a Trump angle here. There always is. So this year, at least, the two most prolific underwriters, US-based underwriters in the small cap IPO market are Dominari Securities and RF Lafferty. These are two pretty small firms, both of them in New York.

They've both taken at least seven companies public this year, including a machine vision company called Leanne Sowell and that hotpot chain restaurant I referred to earlier called Master Beef. Master Beef? Master Beef. Amazing. I love it. Sounds pretty good. Sounds pretty good. So RF Lafferty is headquartered in the Trump building in New York's financial district. Dominaria Securities, which worked on that Diginex IPO we were talking about, ESG Play.

They're in Trump Tower, about four miles north in New York. So I thought that was sort of peculiar.

Perhaps listeners will agree. As you said before, there's only incentive for people to underwrite these small cap IPOs, right? They get fees. They help them get on the market. They don't really care about the performance at the end of the day. And your point is, it's interesting that there might be some links between the Trump organization and these underwriters. It could just be the link is they are a renter, but there might be something more. Is that right? It's interesting given that Trump has made...

No secret of how much he wants to basically sever America's ties economic ties with China and yet given that

Two companies operating in buildings he owns, or at least that have his names on them, are going gangbusters listing Chinese companies on U.S. stock markets. Yeah. Perhaps it's a wild conspiracy theory. But this whole thing with shares suddenly going gangbusters, you know, as you note in your piece, U.S. regulators have been warning about this for years and saying...

This is really funky. You've got to be careful with these types of companies. You might end up losing a lot of money. I guess to me, what it comes down to is this kind of sometimes, particularly in the US, the stock market looks less like a kind of, you know,

majestic piece of the capital allocation process and more like a kind of just casino, like slot machines. And, you know, it's just, I'll have a go on this and, you know, maybe it'll make me rich. That sort of doesn't strike me as really the point of stock markets. I guess it depends how you look at it and how you view investing, particularly in small caps, right? Like there's a sense, and I've kind of picked this up

very slowly since I arrived in New York in January, that caveat mTOR reigns, particularly in this kind of murkier part of the market. So you pay your money, it takes your choice. You take a risk, it's on you. Yeah. It's on you. Exactly. Yeah. You know that these shares are volatile. You know that they're not particularly liquid. You know that they're going to move up and down on no news quite often. Like people who invest in these stocks often

should often know what they're getting themselves into. Not always. Not always, of course. And FINRA, which is one of the regulatory bodies in the US and the Securities and Exchange Commission, do often warn investors about the risks in investing in the small cap space. But beyond some warnings, they haven't done much to tighten up the rules based on the reporting I've been doing over the last few years. And that's irked a lot of investors, a lot of former regulators who think that the SEC and FINRA should be doing more

to either block some of these companies from listing in the first place or clamp down on some of the underwriters who are associated with many of the weird moves that we see almost every day. I'd say it's not uncommon. But it feels like we are in this moment, though, where people, investors and regulators are accepting the slot machine-like nature of markets. Just yesterday, Coinbase, which is the crypto exchange, joined the S&P 500.

which is kind of a big deal. I mean, that you're putting it with the greatest American companies that are listed publicly, and you're saying that this company is worthy of being in the most commonly traded passive index. Mm-hmm.

And I mean, like one of the best performing stocks last year, at least, was MicroStrategy, right? Which Katie did an excellent film on the other day, which is basically a gamble on a gamble. So for anyone who's missed my ritual humiliation on this point, MicroStrategy is actually just called Strategy now, is a company that started life as a software company that didn't go terribly well. So it pivoted into Bitcoin and now all it does is buy Bitcoin and invest.

It issues bonds to get more money to buy more Bitcoin and then the company's worth more. Then it issues more bonds and it buys more Bitcoin. That's it.

That's the company. And it's making people vast amounts of money. And people like me who are like, I just don't really see how this makes sense, are being made to look very silly. So I made a film that was basically predicated on this idea that I got it wrong and I'm a huge idiot and this is how I got it wrong and why I'm a huge idiot. And I'm still getting emails from people saying, oh, you got it wrong, you're a huge idiot. I know. That's what the film says. Go and watch the film. Stop sending me these stupid emails. Yeah.

I mean, you could yet still be proved very, very correct. I could be, but it hasn't worked so far. This is a whole other story. George, you're doing God's work and keeping an eye on this while we all obsess over the really, really big stocks. So keep it going. I watch that stuff too, I swear. You do. You're a busy person. But we're going to be back in a sec with Longshot.

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Okey-doke, it's time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Chaps, I am led to understand that you two have not prepared anything in advance for this, so I will go first. I am limit long Caroline Crenshaw, the sole remaining Democratic Commissioner left on the U.S. Securities and Exchange Commission, the big regulator out there.

She's likely to be leaving at the end of this year and she is going out swinging. She was at a conference earlier this week and she did not hold back. She said the SEC is ignoring significant risks. We are obviously seeing a bit of a free for all, particularly in crypto at the moment.

She said, and I quote, this is a dangerous game. We are pulling apart our own regulatory foundation, block by block, case by case and rule by rule. It all feels too familiar to those of us who've lived through 2008. Caroline Crenshaw, thank you for your service. People, you have been warned. Regulations are there for a reason. Chaps, what do you have? Aidan, do you want to go first?

Sure. I am short DJs. You're short DJs? I think, you know, all well-intentioned and there are some good DJs. But I was at an event this weekend that this DJ was playing songs from like middle school, like when I was in middle school, which was just such a bad read. It was a college reunion. It was such a bad read of the audience. Like they should have been playing songs from when we were in college. Right. And I just was like, how old do this person think we are? Yes. Do you know what I found the other day? Slightly related. What?

Lutnick's old SoundCloud account. Ah, this is son of Secretary of Commerce Howard Lutnick. Yes, everyone should look this up. Is it any good? Don't sleep on this. Is he a good musician? I'll leave that to you to decide, dear listeners. Let's return to this in a later podcast. I like this idea. Yes, we should do a deep dive. George from Short DJs 2. I'll go long flares.

Since I moved to New York, I've noticed that a lot of people here wear flares and I've never had the cojones to do it myself. Like a road flare? No, no, not like rave flares. Like the trousers, the flared trousers, the 70s style trousers. I bought a pair the other day and I really enjoy them. Like flat out flares or kind of boot cut like...

These are like beginner flares. Not dance flares. No, no, no. I'm going to say no more. You're quite a tall person, so I would worry that maybe you might take off. Just be careful about your aerodynamism. You can get away with it in New York. In London, I'd be booed. Booed.

Buden Hirstat. Anything goes out there. So, listeners, you've got your instructions. Please check out Nutnick's SoundCloud between now and the next update from the Unhedged podcast, which will be on Thursday. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.