The past decade, especially the era post our 2008 recession, has witnessed a significant decline in IPOs, DPOs, and Reverse Mergers of micro and small cap companies. Backlash from the SEC due to fraud allegations, Chinese reverse merger scandals, increased reporting costs due to XBRL …etc. have been some of the contributors to this decline. The Jumpstart our Business Startups (Jobs) Act in conjunction with crowdfunding, has help kick-start capital markets and caused a resurgence in IPO, DPO and reverse mergers as of recent. The rebounding of the capital markets, along with new funding methods and regulatory measures has caused small cap companies to seek out legal counsel since managers tend to focus the core fundamentals of their business.
Many Small Cap Companies usually operate without a dedicated in-house counsel and in most cases the founders and/or current management don’t have the requisite legal knowledge to operate in today’s complicated regulatory environment. On the other hand retaining outside counsel can lead to the risk of either hiring an unsuitable attorney or paying too much for legal services. Small and microcap companies should be extremely vigilant in ensuring that they choose the appropriate attorney at a fair price.
As the legal services climate changes many law firms’ business model has evolved into a marketplace where the client company has the upper hand. The famous “billed hours” concept of law firms has given way to a lot of work being done on a fixed fee model. This is extremely beneficial to small cap companies who can otherwise get crippled by attorney fees due to lack of management’s experience in navigating within the public marketplace. The fixed fee model removes any conflict of interest for attorneys who might otherwise unscrupulously engage in prolonging legal matters to maximize their billings while simultaneously allowing small companies to actually budget for legal expenses.
Another important issue for consideration is the selection of an attorney and their firm. The legal firm is only as good as the attorney(s) representing the company, thus it is necessary for company management to research the background of the attorney assigned to them. Small and microcap companies have their own set of issues specific to the market in which they operate and require a different set of skills than those attorneys who tend to handle large caps. Therefore, even an experienced large cap securities attorney with fortune 500 clients may be of little use to smaller public company simply because of a lack of experience in the small/microcap space.
Thus the small and microcap company must research and evaluate whether their attorney has the relevant experience while strategically negotiating their services on a fee based compensation model.
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Paul Sonkin of Columbia Business School Speaks on Micro Cap Value Investing