The Determinants of Successful Micro‐IPOs: An Analysis of Issues Made under the Small Corporate Offering Registration (SCOR) Procedure

In this article we extend the existing IPO literature to the case of micro-IPOs by analyzing a sample of Small Corporate Offering Registration (SCOR) documents from the U.S. state of Washington. Through theory, we identified variables that should impact the probability of success or failure in a SCOR offering and then empirically tested them. Empirical support was found for the relevance of (1) marketing mechanisms and expenses; (2) ownership and governance factors; (3) business life cycle stages; and (4) signaling factors consistent with our theoretical predictions. Initial public offerings (IPOs) have received much attention in the academic literature. IPOs have been used as a platform to test theoretical hypotheses dealing with the costs to go public (Bhagat and Frost 1986; Ritter 1987; Barry; Muscarella, and Vetsuypens 1991; Aggarwal and Rivoli 1991; Lee et al. 1996; Chen and Ritter 2000); agency costs and ownership structure (Schultz 1993; Holthausen and Larcker 1996; Mikkelson, Partch, and Shah 1997; Goergen 1998; Stoughton and Zechner 1998; and Mello and Parsons 1998); governance issues (Frye 1998; Gomes 2000); optimal pricing strategies (Seguin and Smoller 1997; Kim and Ritter 1999); and the timing of the IPO as it pertains to the life cycle of the firm (Maug 2000). A common thread in the majority of this research is to concentrate on firms that go public via an IPO and are listed on a major exchange. This commonality inherently biases these studies to have samples composed of relatively large firms. Indeed, many studies on IPOs eliminate certain IPOs on the basi s that they are too small. As a result of purposeful elimination or accidental exclusion, very small public issues have been mostly ignored in the academic literature. In this study, we attempt to fill a portion of this void by studying micro-cap initial public offerings. The maximum size of the offer for the firms in our sample is one million dollars. This offer size is only a fraction of the value of even the smallest issues included in the existing academic literature. By specifically studying micro-IPOs, we are able to extend the current literature on several theoretical fronts. [1] To measure IPO success, the existing literature uses initial mispricing (for example, Beatty and Ritter 1986; Muscarella and Vetsuypens 1989a and 1989b; Hanley 1993) and the long-run market performance (for example, Ritter 1991; Loughran and Ritter 1995; Bray and Gompers 1997; Loughran and Ritter 2000). However, because aftermarket trading data are not available for our sample of micro-IPOs, we are not able to use these measures of success. Instead, we define a successful offering as one that breaks escrow and allows the firm to receive at least the minimum capital sought. Our sample of micro-IPOs consists of every SCOR available from the state of Washington. [2] This dataset was hand-collected and represents one of the first academic studies to employ a SCOR database. [3] As a more practical matter, one of the primary challenges for entrepreneurial firms is acquiring needed capital. A 1991 Gallup survey of the membership of the National Small Business United found that the majority of small business financing is from entrepreneurs' personal equity investments. Less than one percent of all financing of small businesses derives from external equity (Clancy 1994). This lends evidence to Fazzari, Hubbard, and Petersen's (1987) assertion that small firms have a significant difficulty in finding external equity financing. The need for small businesses to raise outside external equity is becoming more important due to the effects of bank policy promoting consolidation (for example, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994). Berger, Kashyap, and Scalise (1995) present evidence that supports the consolidation hypothesis that lifting geographic restrictions (permitted by the Riegle-Neal Act) leads to mergers, which reduce small business lending. …