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Joseph Lucosky (Lucosky Brookman LLP): Getting a Microcap Deal Done Is a Full Contact Sport · WTR Small-Cap Spotlight

• 0:01
  SPEAKER_00: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_00: I'm your host, Tim Gerdeman, Vice Chair and Co-Founder, and Chief Marketing Officer of Water Tower Research.
• 0:11
  SPEAKER_00: Today I'm pleased to welcome back Joe Lakoski, Managing Director of Lakoski Brookman LLP.
• 0:16
  SPEAKER_00: Lakoskey Brookman is one of the most active law firms in the microcap capital market space, advising companies on IPOs, up list, cross listings, direct listings, and reverse mergers.
• 0:28
  SPEAKER_00: Since 2020, the firm's data desk has tracked virtually every microcap transaction in the market and made that data freely available to the industry.
• 0:36
  SPEAKER_00: A lot has changed since Joe was last with us on this podcast in May of 2026.
• 0:41
  SPEAKER_00: The SEC has appointed Joe to its Small Business Capital Formation Advisory Committee, one of five new members named to four-year terms.
• 0:49
  SPEAKER_00: Joe has also launched his own podcast called Inside the Emerging Growth Markets, now well into its first season.
• 0:56
  SPEAKER_00: And lastly, this summer, there was NASDAQ's proposed$5 million Market Value of Listed Securities continued listing standard, which has dominated the conversation.
• 1:06
  SPEAKER_00: It was approved by the SEC and then stayed just eight days later.
• 1:10
  SPEAKER_00: We will get into all of the details momentarily, along with what six years of Datadesk history is telling Joe about the most recently concluded second quarter of 2026.
• 1:19
  SPEAKER_00: Joe, great to see you again and thanks for joining me.
• 1:21
  SPEAKER_01: Yeah, Tim, thank you for having me.
• 1:23
  SPEAKER_01: I always love coming back on the show and updating the market to what we're seeing from the trenches.
• 1:27
  SPEAKER_00: Our listeners love to hear it.
• 1:29
  SPEAKER_00: Um, Joe, a lot has happened since the last time you were on.
• 1:32
  SPEAKER_00: So let's start with the biggest piece of news.
• 1:34
  SPEAKER_00: The SEC appointed you to its Small Business Capital Formation Advisory Committee, one of five new members named to four-year terms.
• 1:41
  SPEAKER_00: What does that committee actually do in reality and what are you hoping to accomplish over those four years?
• 1:47
  SPEAKER_01: Yeah.
• 1:47
  SPEAKER_01: Well, thank you.
• 1:48
  SPEAKER_01: Uh, thanks for asking about that.
• 1:49
  SPEAKER_01: That was a significant achievement, not just for me and the firm, but I really think for the industry.
• 1:54
  SPEAKER_01: You know, for so long, uh, the emergent growth space has not really had a voice on that committee.
• 2:00
  SPEAKER_01: Uh, that committee basically serves as an advisory uh group to the commissioners, advising them on all the new rules and regulations that come out that affect mainly small business.
• 2:12
  SPEAKER_01: And that includes the microcap and the emergent growth space.
• 2:15
  SPEAKER_01: You see, for 20 years, I've been sitting and uh in the trenches, working with companies, working with the exchanges, living these rules, you know, from a real insider perspective.
• 2:26
  SPEAKER_01: And now I get to sit in that room with my fellow committee members and the commission, you know, quarterly, and really debate and discuss and try to make a change for the emergent growth and the microcap community.
• 2:38
  SPEAKER_01: I'm very excited to be on that committee.
• 2:40
  SPEAKER_01: There are some amazing people, some great perspectives.
• 2:42
  SPEAKER_01: And I really do hope after my four-year term, we can get some change and at least some better understanding for the emerging growth space.
• 2:50
  SPEAKER_01: And I'll say one other thing.
• 2:52
  SPEAKER_01: We are debating right now the biggest reform of a generation in what the commission has put forth.
• 2:58
  SPEAKER_01: And I'm sure your listeners have heard of the registered offering reform rules and uh reform to reform S3, making it easier for emerging growth companies to uh raise capital, along with a whole host of other additions and ways to help small businesses.
• 3:15
  SPEAKER_01: So it's a very exciting time.
• 3:17
  SPEAKER_01: The administration and the commission have been doing a phenomenal job and really trying to think through the process and how to make things easier for our community.
• 3:25
  SPEAKER_00: Well, I love when committees actually bring people with real world experience on.
• 3:29
  SPEAKER_00: So I'm sure your insights will be very, very invaluable to them.
• 3:32
  SPEAKER_00: Um, along that same line, actually, Washington claims that wants more IPOs, and yet the exchanges are letting fewer through.
• 3:38
  SPEAKER_00: Who's actually in charge at this moment?
• 3:40
  SPEAKER_00: Oh, that's a good question.
• 3:42
  SPEAKER_01: I've been talking about this for a long time.
• 3:44
  SPEAKER_01: I call it the great debate or the great disconnect, really.
• 3:47
  SPEAKER_01: So, on the one hand, you have the administration who's doing a great job in trying to make access to capital much easier.
• 3:53
  SPEAKER_01: On the other hand, you have the commission who is following along at least at the top levels.
• 3:57
  SPEAKER_01: Commissioner Atkins and the other commissioners really want to figure out ways to modernize at least the registered offering reform rules in some other ways that smaller and even larger companies report to the public, basically modernize our capital market system.
• 4:12
  SPEAKER_01: But then you have the exchanges, who I believe are in a completely different uh element right now.
• 4:19
  SPEAKER_01: They have been figuring out ways for the last year or two to make it harder, at least for the emerging growth and microcap companies, to list and stay listed on their exchanges.
• 4:28
  SPEAKER_01: Now, I agree that some of these reforms were necessary based on uh the market dynamics, especially uh some foreign influence companies from overseas.
• 4:38
  SPEAKER_01: But there is right now, seems to be a big disconnect between Washington and the exchange.
• 4:43
  SPEAKER_01: And I think both groups have to come together and really uh connect on what they want because it makes no sense to pass all of these wonderful reforms coming out of Washington and then having the exchanges keeping uh companies from listing.
• 4:59
  SPEAKER_01: It takes both sides to say yes.
• 5:01
  SPEAKER_01: Remember, you need the commission and the exchanges to say yes before a company can get listed.
• 5:06
  SPEAKER_01: So I really do hope both sides can come together.
• 5:08
  SPEAKER_01: I'm certainly going down to Washington, both with the committee and in other areas to make sure that our voices are heard in the emergent growth space.
• 5:15
  SPEAKER_01: Um, but I do think, as I'm sure we'll talk about in a few minutes, uh, the markets, at least from the exchange perspective, seem to be opening up a bit.
• 5:24
  SPEAKER_01: And um I'm hopeful that the second half of this year will be a little bit easier, at least for emerging growth companies.
• 5:30
  SPEAKER_00: Great.
• 5:31
  SPEAKER_00: Something else I alluded to in my opening remarks is that since we last spoke, you did launch your own podcast called Inside the Emerging Growth Markets.
• 5:38
  SPEAKER_00: What persuaded you to start your own podcast series, Joe?
• 5:40
  SPEAKER_00: And what have you learned from questions coming back to you from your initial podcast?
• 5:45
  SPEAKER_01: Well, you know, this is a long time in the making.
• 5:47
  SPEAKER_01: This has been years and years and years.
• 5:49
  SPEAKER_01: I've been told by so many people over the years, you know, the the thought leadership that we put out, the effort that we put into the industry should really be heard by the industry.
• 5:59
  SPEAKER_01: Now, that's not something, you know, uh for me.
• 6:01
  SPEAKER_01: It's really for the entire ecosystem.
• 6:04
  SPEAKER_01: Uh I've been answering the same questions over and over and over for years from CEOs, from founders, from investment bankers, and and really other capital markets participants, and it just made sense to put together uh something that we could get out to the entire ecosystem.
• 6:21
  SPEAKER_01: Now, our show is is much different than most.
• 6:24
  SPEAKER_01: We don't have the typical interview style show.
• 6:27
  SPEAKER_01: This is really a from the trenches look at what we are seeing at Lakoski Brookman, what I am seeing in the trenches from dealing with the exchanges and the commission and the other capital markets participants every day.
• 6:38
  SPEAKER_01: So it's a very quick, practical, hard-hitting from the trenches, 20-minute QA every other week on a relevant topic that is really important to our emergent growth uh ecosystem.
• 6:50
  SPEAKER_01: So I hope that people listen in and people enjoy it, but most importantly, that they get value from it and some practical tips that they can put to work in their deals for their companies, you know, for their shareholders, every single episode.
• 7:05
  SPEAKER_00: Well, you have such a catalog of uh knowledge, if you will, between your two ears.
• 7:09
  SPEAKER_00: I'm glad you're starting to share that with the uh broader marketplace.
• 7:11
  SPEAKER_00: Um, I am curious along those lines, though, what is the single most frequent question you're getting from listeners so far?
• 7:17
  SPEAKER_01: Oh, it's absolutely about the exchanges.
• 7:19
  SPEAKER_01: Every single time uh we do a show, we always have to work something into the exchanges because the whole exchange environment has changed.
• 7:27
  SPEAKER_01: You know, Tim, we have gone from a pretty uh ministerial, uh application-based, checkbox-based system over the last, say, four or five years, to really an advocacy-based, iterative process that requires advocacy almost from day one.
• 7:48
  SPEAKER_01: No longer can you just submit an application.
• 7:51
  SPEAKER_01: Can you meet the quantitative listing requirements or the qualitative listing requirements?
• 7:55
  SPEAKER_01: Now the exchanges can actually say no, even if you meet all the criteria.
• 8:01
  SPEAKER_01: So it's a really now a full context sport, a much more advocacy-based process.
• 8:06
  SPEAKER_01: And you really need to have your transaction not just planned out, but thinking and moving and pivoting before bad things happen later in the process because there's no more second chances.
• 8:17
  SPEAKER_01: The exchanges are getting ruthless when it comes to qualifying and more importantly, disqualifying companies in the listing process.
• 8:24
  SPEAKER_00: Sounds a lot more nuanced, which also means your knowledge is actually invaluable to those folks.
• 8:29
  SPEAKER_00: So if I move on, um, we did talk about on the front end about NASDAQ proposing a five million market value of listed securities continued listing standard, which has dominated the conversation throughout really most of the summer.
• 8:41
  SPEAKER_00: Um, the SEC approved it, and eight days later it was stayed.
• 8:44
  SPEAKER_00: Where does that leave the industry and where does that leave individual companies?
• 8:48
  SPEAKER_01: Well, it really leaves us all waiting.
• 8:51
  SPEAKER_01: And I've talked a lot about this uh over on the podcast.
• 8:54
  SPEAKER_01: I've talked about this on you know, some conferences and just in general to the industry.
• 8:59
  SPEAKER_01: Right now we are waiting for the commission really to decide one thing and one thing only, and that is will they take up this rule and hear more from the community on it?
• 9:10
  SPEAKER_01: Because remember what happened.
• 9:12
  SPEAKER_01: There's so much misinformation out there.
• 9:14
  SPEAKER_01: This wasn't an injunction, the commission didn't change their mind.
• 9:17
  SPEAKER_01: What happened was there's a procedural rule that allows anybody basically to petition the commission to review a rule that the commissioners themselves, the physical commissioners, the three members on the commission that they didn't approve.
• 9:32
  SPEAKER_01: That's called delegated authority.
• 9:33
  SPEAKER_01: So they basically delegated that authority to the commission itself, the wider commission in Washington, and they passed the rule.
• 9:40
  SPEAKER_01: When that happens, you can petition them.
• 9:42
  SPEAKER_01: And that's all that happened.
• 9:43
  SPEAKER_01: There was a petition that was submitted.
• 9:45
  SPEAKER_01: Now the physical commissioners themselves are reviewing whether or not they want to actually open up for more comment and consider this rule themselves, or that they want to let it stand.
• 9:55
  SPEAKER_01: And, you know, right now we're expecting some sort of communication from the commission, perhaps in the next couple of weeks into the middle of September.
• 10:03
  SPEAKER_01: If they do open it back up, you know, we may not hear anything for months at a time.
• 10:08
  SPEAKER_01: You know, who knows?
• 10:09
  SPEAKER_01: But right now, everyone is waiting.
• 10:10
  SPEAKER_01: But I think the bigger point on the$5 million rule is that while the industry is waiting, companies should still be planning.
• 10:18
  SPEAKER_01: Just because we got to stay, that is not a strategy.
• 10:21
  SPEAKER_01: You basically need to continue moving forward, working with your shareholders, working with your investors, shoring up your balance sheet, raising your market cap, raising capital, putting more shares into the market, whatever you need to do to make your market cap be a little bit more uh protective if this rule does come back online, either now or anytime in the future.
• 10:43
  SPEAKER_00: Okay.
• 10:43
  SPEAKER_00: So I watch your podcast and I keep a close eye also on your LinkedIn post.
• 10:47
  SPEAKER_00: I know from that activity that you have been making the point that practical pressure starts well above 5 million threshold.
• 10:54
  SPEAKER_00: If that's right, what number should boards really start to focus on?
• 10:57
  SPEAKER_01: Look, that's a great question.
• 10:58
  SPEAKER_01: And we look at a lot of data around the$5 million rule because remember, it's really a cliff here.
• 11:04
  SPEAKER_01: The whole point, the reason why this$5 million rule got so much attention is because it was one of the first times, not the only time, but one of the first times where NASDAQ was potentially going to delist a company without a grace period, without an independent hearing, really without a conversation.
• 11:21
  SPEAKER_01: And that was what made it so dangerous.
• 11:23
  SPEAKER_01: So you're taking companies that may be in a temporary lull and throwing them all in the same category with the companies that maybe really don't deserve to remain on Nasdaq.
• 11:33
  SPEAKER_01: The idea of this rule is fine.
• 11:36
  SPEAKER_01: And I think I support it and others support it in general.
• 11:39
  SPEAKER_01: What we don't support is the automatic cliff nature of it.
• 11:42
  SPEAKER_01: But to answer your question, we've looked at a lot of data, and we think that when companies cross the$50 million market cap threshold, they start to enter the danger zone.
• 11:52
  SPEAKER_01: And certainly when they get below$25 million, you know, the wheels start coming off the bus.
• 11:56
  SPEAKER_01: And then it just goes down and down from there,$10 million to$5 million.
• 12:00
  SPEAKER_01: So companies really need to be on alert when they break that$50 million market cap.
• 12:04
  SPEAKER_01: And there's all kinds of theories on, you know, self-fulfilling prophecies on downward spiral of these companies, from short sellers to other, you know, mechanics, uh, automatic computer trading.
• 12:16
  SPEAKER_01: There's there's a lot of things that go into that uh framework.
• 12:19
  SPEAKER_01: So I think boards need to be on alert anywhere from$50 million on down to$5 million.
• 12:25
  SPEAKER_00: That's helpful.
• 12:26
  SPEAKER_00: And I also um I'm going to bet that a few CEOs are going to have sleepless nights after listening to this podcast.
• 12:31
  SPEAKER_01: Well, listen, I I agree.
• 12:33
  SPEAKER_01: And I also think that you know they need to be tracking it.
• 12:35
  SPEAKER_01: And there's some new technology out there, too, that um, you know, we've been exploring and looking at that can really help companies track their market cap and and and more than that, offer solutions on how to solve the problem.
• 12:47
  SPEAKER_01: Because again, if this rule is passed, and I'm not saying it will be, but if it is, it is going to be a very harsh reality for about 200 companies uh on day one.
• 12:57
  SPEAKER_00: That's significant.
• 12:58
  SPEAKER_00: Um, so Joe, you've been one of the loudest voices in the market on that rule, and that's not unusual for your personality.
• 13:04
  SPEAKER_00: You're as about as shy as I am.
• 13:05
  SPEAKER_00: So um, you're known as the attorney that other attorneys tend to quote rather frequently.
• 13:10
  SPEAKER_00: Why do you think that is, and how important is it for Lakoskey Brookman to be at the forefront of thought leadership in this space?
• 13:17
  SPEAKER_01: Well, look, I appreciate you saying that, and it is a compliment.
• 13:20
  SPEAKER_01: You know, I take that very seriously.
• 13:22
  SPEAKER_01: I think our approach has always been a little bit different, Tim.
• 13:25
  SPEAKER_01: We're not looking to do every deal and grab every dollar in the marketplace.
• 13:29
  SPEAKER_01: And I'm not saying there's anything wrong with that strategy.
• 13:31
  SPEAKER_01: Our competitors are free to do what they want.
• 13:33
  SPEAKER_01: We've always looked at this more of an industry-wide uh, you know, focus.
• 13:39
  SPEAKER_01: And the reason we do this is because we think that if we can help educate and elevate the industry with our data, with our thought leadership, our opinions, our experiences, now the podcast, you know, sitting on the committee, that will elevate everybody.
• 13:53
  SPEAKER_01: Remember, this is our home, this is our community.
• 13:55
  SPEAKER_01: We're proud of the emerging growth space, we're proud of the microcap.
• 13:58
  SPEAKER_01: We lean into it, much like a lot of others who try to run away from it, yet that's where they, you know, practice the most.
• 14:04
  SPEAKER_01: So we want everyone to be elevated, want everyone to make money, everyone to do good deals, want all shareholders to thrive.
• 14:11
  SPEAKER_01: Now, that's not going to happen, but at least we can do our part to elevate and upgrade the industry.
• 14:16
  SPEAKER_01: And that's the approach we've taken.
• 14:18
  SPEAKER_01: So from our data to the podcast to any conferences, keynote speeches, anything we do, we're really trying to make uh the community and ecosystem better.
• 14:28
  SPEAKER_00: That's great.
• 14:29
  SPEAKER_00: I mean, that really strikes me on a personal level of the difference between marketing and actual thought leadership.
• 14:33
  SPEAKER_00: So well done.
• 14:34
  SPEAKER_00: Um, so Joe, when you were on earlier this year, you talked about a wave of new rules coming out both on NASDAQ and the NYSC.
• 14:41
  SPEAKER_00: Now that the first half of 26 is in the books, let me ask you in reverse, how much of the actual 1H26 data can be explained by those rule changes?
• 14:50
  SPEAKER_01: Uh I mean, I think all of it.
• 14:52
  SPEAKER_01: I mean, we are seeing a monumental shift in the way microcap and emerging growth companies go public on really both exchanges.
• 15:00
  SPEAKER_01: And just to step back for a second, remember, this all started in really September of 2024 when the New York Stock Exchange implemented their$10 million gross proceeds rule, which really rocked the industry.
• 15:12
  SPEAKER_01: And then from there, Nasdaq followed along with$15 million, then they eliminated an income exception, then they passed a larger rule for Asian and mainly China issuers at$25 million.
• 15:23
  SPEAKER_01: And then in December of 2025 was the big one.
• 15:26
  SPEAKER_01: That's when they really uh passed their discretionary rule, which basically says that if even if you qualify all quantitatively and qualitatively, they can still deny your listing.
• 15:36
  SPEAKER_01: And that's the one that has everyone on edge.
• 15:38
  SPEAKER_01: And that single rule alone, combined with the rest, but really that rule primarily has upended the traditional IPO market.
• 15:47
  SPEAKER_01: And so much so that this is the first time in history where the alternative pathways, the uplist and the direct listings, have outpaced the traditional IPO.
• 15:57
  SPEAKER_01: And the data has borne that out.
• 15:59
  SPEAKER_01: So everything that you are seeing right now in the emerging world space and the uh microcap world is coming from that December 2025 discretionary rule that Nasdaq passed.
• 16:10
  SPEAKER_00: Wow, those numbers you just said are uh pretty daunting in a wake-up call.
• 16:14
  SPEAKER_00: Um so let's get into the actual numbers.
• 16:16
  SPEAKER_00: The second quarter of 26 produced seven microcap IPOs.
• 16:19
  SPEAKER_00: What stood out most to you when you reflect back on the second quarter data?
• 16:24
  SPEAKER_01: Well, that's uh, you know, I look at this data all the time.
• 16:27
  SPEAKER_01: It's kind of what we do.
• 16:28
  SPEAKER_01: And uh the funny part is that um, you know, the the the industry has been getting a little bit um, I will say, better as far as as time goes on.
• 16:40
  SPEAKER_01: We're we're feeling it and we're seeing it.
• 16:41
  SPEAKER_01: I was just having this conversation with someone the other day, and this is why data is so important.
• 16:46
  SPEAKER_01: I was talking to another attorney, and we both were commenting that wow, you know, the the NASDAQ, the New York Stock Exchange, things are starting to feel a little bit better.
• 16:55
  SPEAKER_01: We're seeing it in our exchanges and our dialogue with uh the commission and the NASDAQ and the New York Stock Exchange.
• 17:02
  SPEAKER_01: But then when you look at the data, it really hasn't changed.
• 17:05
  SPEAKER_01: The first quarter of 2026 produced six IPOs, down from like 35 in 2025.
• 17:12
  SPEAKER_01: The second quarter was better, but not by much.
• 17:16
  SPEAKER_01: I believe there were about seven emerging growth or microcap IPOs in the second quarter.
• 17:22
  SPEAKER_01: But here's what the underlying data really tells us and why I'm feeling a little bit better.
• 17:28
  SPEAKER_01: Maybe we're not so off, and that is this.
• 17:30
  SPEAKER_01: In the first quarter, it was the first time when the New York stock exchange and the NASDAQ were really 50-50 split.
• 17:37
  SPEAKER_01: Generally, NASDAQ had dominated microcap listings.
• 17:40
  SPEAKER_01: The second quarter, we're starting to get back to where we would traditionally or typically see that split be.
• 17:46
  SPEAKER_01: So there were six Nasdaq IPOs and one uh, you know, New York stock exchange IPO.
• 17:52
  SPEAKER_01: But here's the really important point, and that is this the foreign private issuers.
• 17:57
  SPEAKER_01: That's the statistic and the data we're looking at.
• 17:59
  SPEAKER_01: In the first quarter, there was one foreign private issuer, and that was on the New York Stock Exchange.
• 18:04
  SPEAKER_01: In the second quarter, there were three foreign private issuers.
• 18:08
  SPEAKER_01: Now, again, one to three isn't a big jump, but it is progress, right?
• 18:11
  SPEAKER_01: Especially compared to uh what everyone thought it could be, which was zero.
• 18:15
  SPEAKER_01: And clearly it's down from 2025, but slowly making progress.
• 18:19
  SPEAKER_01: And what that tells me is this the exchanges are starting to get a little bit more comfortable implementing those discretionary rules.
• 18:27
  SPEAKER_01: What to look for, how to react to companies, how to maybe help them through the process.
• 18:31
  SPEAKER_01: And I'm optimistic that the third quarter and fourth quarter are going to be even better than the first or second.
• 18:36
  SPEAKER_01: Now, are we gonna get back to 2025 numbers?
• 18:39
  SPEAKER_01: Probably not.
• 18:40
  SPEAKER_01: But I do think the exchanges over time, as they as they start to understand the rules a little bit more and get comfortable with implementing them, we will see more traditional IPOs get approved even from foreign jurisdictions.
• 18:55
  SPEAKER_00: So IPO volume was down roughly 79% year over year, but the median offering size more than doubled from about 8 million to approximately 16 and a half million.
• 19:05
  SPEAKER_00: What do you think explains fewer deals but bigger ones?
• 19:08
  SPEAKER_01: Well, again, it's the same thing.
• 19:10
  SPEAKER_01: You know, when NASDAQ passed this discretionary rule back in December 2025, it really did shake the industry.
• 19:16
  SPEAKER_01: I mean, it shook up the entire way deals were done.
• 19:20
  SPEAKER_01: It wasn't just the rule itself, it was the behavior that had to change on how you do a deal, how you execute a deal, what you do on a daily basis.
• 19:29
  SPEAKER_01: And that's really the biggest difference.
• 19:32
  SPEAKER_01: Um, I will tell you that uh even though the uh the numbers are down uh on the IPO side, the alternatives have really made a huge comeback.
• 19:43
  SPEAKER_01: We are seeing more direct listings, we are seeing more up listings from the OTC.
• 19:48
  SPEAKER_01: Uh, the first time ever in the history, since we've been tracking data for seven years, have the alternative pathways outpaced the traditional IPO?
• 19:56
  SPEAKER_01: And that's a huge deal for the industry.
• 19:58
  SPEAKER_01: Again, it was behavior-changing rules, not just the rules themselves that really uh affected the microcap uh world.
• 20:07
  SPEAKER_00: Great.
• 20:08
  SPEAKER_00: So you did obviously just touch on alternative pathways, which is wonderful.
• 20:11
  SPEAKER_00: Um, with the front door this narrow, I'm curious though, where is the activity actually going for up lists, cross list, direct listings, and even reverse mergers?
• 20:19
  SPEAKER_01: Well, I again I think you know there was a lot of activity in the alternative pathways.
• 20:24
  SPEAKER_01: Traditionally, the IPO pathway has always been the most significant.
• 20:28
  SPEAKER_01: Everybody wants to do an IPO.
• 20:30
  SPEAKER_01: All the industry professionals have pushed an IPO.
• 20:32
  SPEAKER_01: But this year alone, the industry has, you know, gotten on board with where the market is going.
• 20:37
  SPEAKER_01: So these alternative pathways have taken over.
• 20:40
  SPEAKER_01: And then the industry, I believe, is putting more effort and resources into these uplistings from the OTC, cross listings from foreign jurisdictions, reverse mergers, and direct listings.
• 20:51
  SPEAKER_01: Direct listings is really the hidden gem here.
• 20:53
  SPEAKER_01: And I just did a podcast episode about this uh a few weeks ago.
• 20:58
  SPEAKER_01: It really is the alternative to the IPO because they're very similar.
• 21:01
  SPEAKER_01: They're both related to private companies.
• 21:03
  SPEAKER_01: You know, not every company qualifies for a direct listing where it might qualify for an IPO, but the direct listings are really the theme of 2026, in my opinion, along with the alternative pathways that are far outpacing the traditional IPO.
• 21:17
  SPEAKER_00: Sticking with direct listings for a second, my recollection is that more than a third of the new listing activity in Q2 was actually direct listings.
• 21:24
  SPEAKER_00: Are they more of a permanent part of the conversation, in your opinion?
• 21:27
  SPEAKER_00: And how do you think about the aftermarket performance issue?
• 21:30
  SPEAKER_01: Yeah, that's a great question.
• 21:32
  SPEAKER_01: And uh I'll address it in the first part.
• 21:34
  SPEAKER_01: Uh, the first part, I think they are a permanent part.
• 21:38
  SPEAKER_01: The direct listing is really now the new alternative to the IPO, but we have to ask why.
• 21:42
  SPEAKER_01: It's easy to just say that.
• 21:43
  SPEAKER_01: It's great to see a headline on LinkedIn or or something like that, but but you got to find out why.
• 21:48
  SPEAKER_01: And here's why I think the direct listings are so prominent in this market.
• 21:53
  SPEAKER_01: Because remember what happened when NASDAQ was changing their rules related to how listings are approved.
• 22:00
  SPEAKER_01: And the discretionary rules was mainly driven by a lot of the volatility that we saw in 2025, mainly coming from Asian companies and foreign companies.
• 22:10
  SPEAKER_01: The direct listing is very different.
• 22:12
  SPEAKER_01: Remember, you're just registering existing shareholders that maybe have been with the company for many years.
• 22:18
  SPEAKER_01: So there's no real horsepower on listing day that comes with an IPO, where you have existing holders, you have new holders, you have new shareholders, you have the banks, stabilizing transactions, a lot of activity that comes with an IPO that doesn't happen with the direct listing.
• 22:34
  SPEAKER_01: So I think the exchanges have gotten a little bit more comfortable on approving the direct listing path.
• 22:41
  SPEAKER_01: Now, this is just my opinion, but the data seems to bear that out.
• 22:44
  SPEAKER_01: So I do think they are here to stay.
• 22:46
  SPEAKER_01: Now to the second part, which I think is uh a great question.
• 22:50
  SPEAKER_01: I've said this many times as well.
• 22:52
  SPEAKER_01: The post-listing performance of these direct listings has not been wonderful.
• 22:56
  SPEAKER_01: In fact, even the deals we've done have not been wonderful.
• 22:59
  SPEAKER_01: And I think the industry needs to have a better conversation for these companies that are direct listing on how to really help their shareholders, help their share price, get eyeballs on the company that otherwise would naturally maybe come with an IPO and an underwriter and maybe a traditional roadshow.
• 23:20
  SPEAKER_01: Because you're right, the aftermarket performance of these direct listings has not been great.
• 23:24
  SPEAKER_01: And I do think it's a it's a question for the industry to address.
• 23:27
  SPEAKER_01: Now, it also hasn't been volatile.
• 23:29
  SPEAKER_01: Just because it hasn't been great, meaning it's been declining, uh, doesn't mean it's bad.
• 23:34
  SPEAKER_01: But the from a volatility perspective, which led to all these new rules, we're not seeing that.
• 23:39
  SPEAKER_01: We're just seeing downward pressure on these on these companies uh from the minute they list to you know the first 30 days and beyond.
• 23:47
  SPEAKER_00: Right.
• 23:47
  SPEAKER_00: I'm disappointed selfishly you didn't say because they don't have enough independent research coverage.
• 23:51
  SPEAKER_00: Um talk about alternative talking about alternative pathways, it wouldn't be a complete conversation if I didn't ask you quickly about reverse mergers.
• 23:59
  SPEAKER_00: They seem to be coming back.
• 24:00
  SPEAKER_00: I'm curious from your view, um, what is driving that and what has changed about how the exchanges now look at reverse mergers?
• 24:07
  SPEAKER_01: Well, I think there's a couple things.
• 24:08
  SPEAKER_01: I do think reverse mergers are becoming a lot more popular for a number of reasons.
• 24:13
  SPEAKER_01: I mean, there's probably three or four different reasons.
• 24:16
  SPEAKER_01: The first reason is that remember, the traditional IPO pathway, which we've already talked about, has become much more constricted.
• 24:22
  SPEAKER_01: It's harder.
• 24:23
  SPEAKER_01: So companies think, hey, I might be able to do a reverse merger, even though you have to meet the initial listing requirements, you know, depending on how you do it, it could be a little bit easier.
• 24:32
  SPEAKER_01: But I think the bigger reason that reverse mergers are more prominent is because NASDAQ is also proposing tougher continued listing rules, especially this$5 million rule that we just talked about.
• 24:43
  SPEAKER_01: So companies that maybe are in danger of the$5 million or maybe in danger of getting delisted because of shareholders' equity or bid price or any other continued listing requirement are trying to find ways to enhance their shareholder value.
• 24:59
  SPEAKER_01: Getting delisted doesn't help anybody.
• 25:01
  SPEAKER_01: You go down to the OTC and your shareholders have less liquidity, and there's all kinds of problems.
• 25:06
  SPEAKER_01: So I think what good boards are trying to figure out how can we create the most shareholder value?
• 25:11
  SPEAKER_01: And those companies that maybe have low market cap or low bid price or other problems are saying, look, let's try to find the company to acquire or to merge into our business so we can continue to pride shareholder value.
• 25:24
  SPEAKER_01: So there's a combination of factors.
• 25:26
  SPEAKER_01: Like I said, the IPO being constricted, the continued listing rules being tougher.
• 25:31
  SPEAKER_01: And here's a third one that I think really hasn't been talked about a lot, but I'm seeing more and more.
• 25:38
  SPEAKER_01: Remember, 2025 was the year of the digital asset treasury deal.
• 25:43
  SPEAKER_01: So a lot of these companies, you know, over 200 of them in the microcap space, did what we call the debt deal, a treasury strategy.
• 25:49
  SPEAKER_01: They put coin and cash on the balance sheet in a cryptocurrency.
• 25:55
  SPEAKER_01: A lot of those strategies did not work out for whatever reason.
• 25:58
  SPEAKER_01: So you have a number of companies sitting with cash and coin on the balance sheet, albeit maybe depressed or undervalued or below net asset value, they too are looking for a uh reverse merger or some sort of acquisition.
• 26:11
  SPEAKER_01: And remember, they have cash kind of like a SPAC, but without all the traditional redemption rules and other sort of bureaucratic rules that come with a SPAC.
• 26:21
  SPEAKER_01: So all of those factors are, I think, converging to make the reverse merger a lot more popular in 2026.
• 26:29
  SPEAKER_00: So if I move along to uh foreign private issuers, uh, the last time you were on with me, we discussed foreign private issuers or so-called FPIs largely disappearing from the microcap market.
• 26:39
  SPEAKER_00: In the first quarter of 2026, there were none at all.
• 26:42
  SPEAKER_00: Now we've had FPIs fared a little better, I think, in the second quarter.
• 26:46
  SPEAKER_00: Uh, what would you tell a foreign management team looking to get approved on NASDAQ right now?
• 26:51
  SPEAKER_01: Yeah.
• 26:51
  SPEAKER_01: Well, that's a great question because you know, we spend a lot of time trying to figure out how to get foreign companies approved.
• 26:59
  SPEAKER_01: And it's not just from China, from Malaysia, Indonesia, Japan.
• 27:02
  SPEAKER_01: You know, we just got a big Japanese direct listing approved recently.
• 27:07
  SPEAKER_01: Um, you know, we've we've gotten some others in in the uh pipeline that I think are going to do very well.
• 27:14
  SPEAKER_01: The trick or the key to a foreign private issuer uh in 2026 is really structuring it properly from the beginning.
• 27:21
  SPEAKER_01: You know, NASDAQ passed these discretionary rules back in December and they put out some guidance.
• 27:27
  SPEAKER_01: Problem is the guidance doesn't really give you all of the information.
• 27:31
  SPEAKER_01: You have to really figure this out from trial and error and practice.
• 27:34
  SPEAKER_01: And luckily, we talk to the exchanges all the time.
• 27:36
  SPEAKER_01: We talk to the entire industry, we're working on many live transactions.
• 27:40
  SPEAKER_01: So we're constantly updating sort of our best practice list.
• 27:44
  SPEAKER_01: And I do think that for program priority issuers, you have to take a look at all of the companies that the SEC suspended, all the companies that NASDAQ didn't like, and try to reverse engineer the process on what we'll get through.
• 27:57
  SPEAKER_01: And, you know, some things are maybe logical and can be figured out, and some things are just counterintuitive that come through, you know, perspective.
• 28:05
  SPEAKER_01: And that's what we're doing.
• 28:06
  SPEAKER_01: You know, we really do keep a running list and the best practice and try to make sure these foreign companies get the best advice because what we're seeing is once you get to the end of that process, the exchanges aren't coming to you and saying, hey, we don't like this, change that, or maybe you want to think about that.
• 28:22
  SPEAKER_01: They're just saying no.
• 28:24
  SPEAKER_01: And that's a problem.
• 28:25
  SPEAKER_01: So, like I say all the time, and I've said earlier, you're not getting second chances in this market.
• 28:31
  SPEAKER_01: So you really have to structure and be proactive and do all those things up front.
• 28:36
  SPEAKER_01: And it's organizations like us who are really at the forefront of that process and procedure that hopefully are going to be able to get some of these good foreign companies, the ones that deserve to be listed back in the U.S.
• 28:48
  SPEAKER_01: capital markets on the Nasdaq and the New York Stock Exchange.
• 28:51
  SPEAKER_00: Um, Joe, given that uh our Watertower Research Podcast has very broad global um reach these days, um, I'd be remiss if I didn't ask you, does country of origin matter?
• 29:02
  SPEAKER_01: You know, it does.
• 29:03
  SPEAKER_01: I will tell you, um, we'd like to think it doesn't, but it does.
• 29:06
  SPEAKER_01: It just absolutely does.
• 29:07
  SPEAKER_01: I don't care what anybody tells you, it absolutely does.
• 29:11
  SPEAKER_01: And the companies that are coming from Hong Kong or mainline China specifically are the ones having the most difficult time.
• 29:19
  SPEAKER_01: They're also the ones, though, that come with the most structure, the most geographic limitations, um, you know, and other considerations that the exchanges aren't so fond of these days.
• 29:30
  SPEAKER_01: So I I think if you're an Asian company in Malaysia or Indonesia or Singapore, you might have, or Japan, you might have a slightly easier road, but but not by much.
• 29:41
  SPEAKER_01: You still have to follow all the rules.
• 29:43
  SPEAKER_01: You still have to sort of structure the deal properly, you still have to pay attention to what the exchanges like and don't like.
• 29:48
  SPEAKER_01: And again, we we track this best practice list, but it does matter.
• 29:52
  SPEAKER_01: Now, is it is it the only factor?
• 29:55
  SPEAKER_01: No.
• 29:55
  SPEAKER_01: If you have a company that is in Hong Kong or mainland China, and their their corporate structure isn't complicated, their directors have U.S.
• 30:04
  SPEAKER_01: capital markets experience.
• 30:06
  SPEAKER_01: They don't have um all of their assets or all of their operations locked in some you know far-flung province of mainland China, and there's access to you know regulations and rules that you know cross-country.
• 30:20
  SPEAKER_01: You could get approved.
• 30:21
  SPEAKER_01: But the problem is a lot of these companies are still using the old playbook, mainly because their advisors are telling them to.
• 30:28
  SPEAKER_01: And that doesn't work anymore.
• 30:30
  SPEAKER_01: The system has changed, the process has changed, and it's time for the foreign private issuers who want to come get listed here in the United States to change.
• 30:39
  SPEAKER_00: So I'm curious, kind of at a very high level, a year from now, when we look back on this stretch that we've gone through and we'll probably continue to go through for a bit, what do you think we'll end up saying it was?
• 30:48
  SPEAKER_00: Was it a correction, a reset, or a start of something structurally different?
• 30:53
  SPEAKER_01: You know, I think it's something that is very structurally different.
• 30:58
  SPEAKER_01: I don't think this is a market problem.
• 31:00
  SPEAKER_01: I mean, look, the broader capital markets are doing well, the Dow is up, IPO market is, you know, fairly good, you know, with SpaceX and some other big monsters coming down the pipeline.
• 31:10
  SPEAKER_01: Now is it great?
• 31:11
  SPEAKER_01: No, but it's not certainly as off as the microcap world has been.
• 31:16
  SPEAKER_01: So it really is a structural changes.
• 31:18
  SPEAKER_01: You know, the SEC has been very focused on enforcing and implementing rules around these foreign issuers.
• 31:26
  SPEAKER_01: NASDAQ itself has to protect this exchange, has passed rules to make sure that they know the integrity of the companies and the people around the companies, more importantly, that are going to be listed.
• 31:37
  SPEAKER_01: And all of that has culminated in this discretionary framework that Nasdaq put forth in December 2025.
• 31:43
  SPEAKER_01: So I think it's an institutional change of rules, but more importantly, an institutional change in behavior.
• 31:50
  SPEAKER_01: And the faster the market adapts to that change in behavior based on the change in rules, the better off it will be.
• 31:57
  SPEAKER_00: Agreed.
• 31:58
  SPEAKER_00: So just wrapping things up, Joe, what is the one thing you want issuers, investors, and advisors to walk away with today from this podcast?
• 32:05
  SPEAKER_01: Well, I think related to the market, uh the microcap world and the in the emerging growth space, the behavior has changed, the market has changed so much so that if you're operating off the old playbook from 2025, 2024, you need to change because this has really become a full contact sport.
• 32:25
  SPEAKER_01: There are no more deals that squeak by, there are no more minimum deals, there are no more easy deals.
• 32:30
  SPEAKER_01: It is a full contact sport.
• 32:32
  SPEAKER_01: And if you don't have an advocate, someone like me or someone else who's a good, true advocate, a quarterback on your side, waking up every day, trying to get your deal over the finish line, you are gonna have a very tough time getting listed in 2026 and beyond.
• 32:48
  SPEAKER_00: Wise words.
• 32:49
  SPEAKER_00: Joe, thanks again for joining us today.
• 32:51
  SPEAKER_00: As always, this was incredibly insightful, and I know our audience is gonna love listening to it, and they'll probably listen to it more than once.
• 32:56
  SPEAKER_00: I will personally invite you back onto the podcast the next time you have a new data drop to share.
• 33:00
  SPEAKER_00: So thanks for your time.
• 33:01
  SPEAKER_01: Great.
• 33:02
  SPEAKER_01: Thank you, Tim.
• 33:02
  SPEAKER_01: Always a pleasure being here.
• 33:06
  SPEAKER_00: Thank you for listening, and don't forget to subscribe as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 33:22
  SPEAKER_00: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 33:27
  SPEAKER_00: Finally, a special thanks to the producer and editor of the podcast, Christoph Fitzpatrick.