Let’s start with a number that doesn’t get nearly enough attention: 8,090. That was the total number of publicly traded companies listed on U.S. exchanges at the market’s peak in 1996. Today, that number has been cut nearly in half — sitting just under 4,000. Meanwhile, the firms responsible for connecting investors to those companies — broker-dealers — have followed a nearly identical path. From a high of roughly 10,000 registered firms in the early 1990s, we’re down to around 3,300 today.

On the surface, you might think that’s fine. Markets are bigger than ever. The S&P 500 keeps making headlines. Apple, Nvidia, and Microsoft alone are worth more than most of the world’s national economies. But underneath that glossy surface, something structural has changed — and it has real consequences for private companies trying to raise capital, for investors looking for genuine opportunity, and for the health of American capitalism as a whole.

“Where growth once happened after a firm’s IPO, it now happens beforehand — inside private funds that most Americans will never access.”

The Great Consolidation

The story of how we got here is really two stories running in parallel. On the broker-dealer side, the industry peaked in the early 1990s when loose entry requirements, a roaring bull market, and the explosion of retail investing drove thousands of small firms into business. By 2005, NASD — the predecessor to FINRA — regulated more than 5,100 broker-dealer firms and 650,000 registered representatives. Since then, firm counts have declined every single year for roughly two decades. By 2024, FINRA-registered broker-dealers had fallen to approximately 3,249 — a drop of nearly 40% from just 2005 levels, and more than 60% from the early-1990s peak.

The number of registered individual brokers — the people who actually talk to clients and move capital — tells a slightly different story. That number has stayed remarkably stable, hovering around 620,000 to 650,000 for the past twenty years. What’s changed isn’t the headcount — it’s the consolidation behind it. Far fewer firms now employ roughly the same number of people. The boutique independent brokerage, the regional firm, the scrappy small-cap specialist — those are largely gone, swallowed up by the Merrills, the Morgans, and the Fidelities of the world.

On the public company side, the dynamics are similar. The U.S. listing universe peaked in 1996 at 8,090 domestically incorporated companies on major exchanges. By 2000, the dot-com bust had started the erosion. Sarbanes-Oxley in 2002 raised the compliance floor dramatically. Dodd-Frank in 2010 added another layer. Each successive regulation increased the cost and burden of being a public company — costs that are manageable for a large-cap with a full compliance department, but genuinely prohibitive for a smaller growth company that would rather put its resources into product development than SEC filings.

“Successive layers of regulation have raised compliance costs in ways that disproportionately impact smaller issuers.” — U.S. House Financial Services Committee, 2025

Are Capital Markets Less Efficient? Yes — But Not in the Way You Think

Here’s the question worth asking directly: does a smaller public market and fewer broker-dealers mean capital markets are less efficient? The honest answer is nuanced — but ultimately, yes, particularly for smaller private companies trying to access growth capital and for ordinary investors trying to participate in that growth.

The efficiency argument cuts two ways. The remaining public companies are, on average, much larger, older, and better-capitalized than their predecessors. The average market cap of a listed U.S. company today is roughly $7 billion — a dramatic increase from the 1990s. So the public market is, in one sense, a higher-quality market. Fewer companies, but stronger ones.

The problem is what that leaves out. The engine of American growth — the startup, the regional manufacturer, the biotech startup without a Silicon Valley zip code — now operates almost entirely outside the view of the average investor. As of December 2024, there are nearly three times as many U.S. companies backed by private equity than there are public listings. The wealth creation that used to flow through IPOs now happens inside private funds that most Americans will never have access to.

J.P. Morgan Asset Management put it plainly in a recent analysis: these areas of the private markets now provide the financing that small- and mid-cap public markets once supplied. In the late 1990s, the median age of a U.S. company at the time of its IPO was around five and a half years. In 2024, that had risen to 14 years. Companies aren’t going public earlier and using the capital to grow — they’re growing entirely in private, often only going public once the big gains are already baked in.

The investor who missed the first five years of Amazon’s growth in the 1990s still had plenty of upside ahead. The investor who misses the first 14 years of a company’s private life today is showing up at a very different party.

“In the late 1990s, the median age of a U.S. company at IPO was about 5.5 years. In 2024, that had risen to 14 years.”

The Penny Stock Problem: What’s Actually Left

When people talk about the roughly 4,000 publicly listed companies in the U.S. today, they’re often painting a rosier picture than reality warrants. Because while those 4,000 represent the major exchange listings — NYSE and NASDAQ combined — the full picture of publicly tradeable U.S. equities includes a much larger, far murkier universe.

The OTC (over-the-counter) markets, run by OTC Markets Group through its tiers of OTCQX, OTCQB, and Pink Sheets, list nearly 10,000 additional securities. This is where companies go when they’ve been delisted from major exchanges — or when they were never equipped to meet major exchange standards in the first place. And the vast majority of what lives here is, in the regulatory and practical sense, penny stock territory.

Penny stocks — defined by the SEC as shares trading below $5 per share that don’t meet major exchange listing standards — are not a niche phenomenon. Roughly 350 stocks on the NASDAQ and NYSE have a share price under $1. But over in the OTC markets, more than 4,000 stocks trade under $1. The Pink Open Market — the lowest tier, with the fewest disclosure requirements — is home to penny stocks, shell companies, companies in bankruptcy, and businesses that choose not to disclose meaningful financial information at all.

Here’s why this matters from a market efficiency standpoint: broker-dealers cannot recommend penny stock transactions to retail clients. Not may not — cannot. Federal penny stock rules require additional disclosures, written agreements, and risk acknowledgments before any retail penny stock transaction can occur. As a result, no analysts cover these companies, no financial advisors recommend them, and institutional investors almost universally avoid them. The OTCQX tier was specifically designed to exclude penny stocks — precisely because their presence in the OTC ecosystem poisons the well for legitimate small companies trying to raise growth capital.

The practical result is a two-tier market with a vast, mostly illiquid grey zone in between. Investors with access to private equity and venture capital funds can participate in genuine early-stage growth. Investors in the public markets can participate in the well-covered, heavily traded large-cap universe. What’s missing is the middle — the small-cap, early-stage public company that once served as the bridge between startup and scale.

“A broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for penny stocks.”

The Investor Access Problem Is Getting Worse

Let’s be direct about who gets hurt most by this structure. It isn’t the pension fund manager or the endowment CIO. Institutional investors have adapted. Private equity and venture capital have grown explosively to fill the vacuum left by retreating public markets, and sophisticated institutions have followed the capital. Global venture capital funding for AI startups alone surged to $131.5 billion in 2024 — a 52% year-over-year increase — pouring into companies that may not see a public listing for another decade, if ever.

The people left behind are the retail investor and the small investment fund manager. Regulatory restrictions on what constitutes an ‘accredited investor’ — currently requiring a net worth of over $1 million excluding a primary residence, or income exceeding $200,000 annually — effectively lock the majority of Americans out of private market participation. Congress has recognized this: the INVEST Act of 2025, which passed the House 302-123 in December, would modernize the accredited investor definition to include professional licensure and experience as qualifying criteria. But the Senate has yet to act, and even if it does, the structural dynamics won’t change overnight.

For small investment funds, the problem is different but equally real. Fewer public companies means fewer investable ideas, particularly in the small and micro-cap space where genuine price discovery and alpha generation are still possible. Many small funds are effectively forced to choose between the highly competitive, heavily analyzed large-cap universe — where every edge has been arbitraged away — or the illiquid, fraud-prone penny stock space where the risk-reward calculus rarely justifies the position. The fertile middle ground that once existed — the $50 million to $500 million market cap company with a genuine business, analyst coverage, and institutional sponsorship — has been hollowing out for thirty years.

Only 13% of small public companies raised capital through registered equity offerings in the 12 months ending June 2024, according to the SEC’s own Office of the Advocate for Small Business Capital Formation. That is a damning statistic. The public market is supposed to be the mechanism through which growing companies access growth capital. When only one in eight small public companies is actually using it for that purpose, the mechanism is broken.

“Only 13% of small public companies raised capital through registered equity offerings in the 12 months ending June 2024.”  — SEC Office of the Advocate for Small Business Capital Formation

The Hidden Risk: Private Capital Is Running on Borrowed Money

Here’s the part of the private markets story that doesn’t get told often enough at the investor conferences and LP roadshows: a significant portion of what looks like private capital strength is actually leveraged capital dressed up in a performance story. And as interest rates have risen dramatically from the near-zero environment that turbocharged the PE buyout boom, the structural fragility of that model is starting to show.

The basic math of a leveraged buyout is straightforward. A private equity firm acquires a company for, say, $100 million — putting up $40 million of its own equity and borrowing $60 million. If the company’s value grows to $120 million, the firm’s return on its equity investment isn’t 20% — it’s 50%. Leverage amplifies gains. But it also amplifies losses, and it saddles the underlying portfolio company with debt obligations that constrain everything from R&D investment to hiring to long-term strategic planning.

Over the decade through 2023, global buyout companies carried an average leverage ratio of 1.74 — meaning 74 cents of debt for every dollar of equity invested. By comparison, global small-cap public companies averaged a ratio of 1.4 over the same period. In other words, private equity’s outperformance has historically been built in significant part on financial engineering, not just operational excellence. When debt was essentially free between 2010 and 2021, that worked spectacularly. Now it doesn’t work as well.

The cost of debt on private equity deals has roughly doubled from around 4% in early 2022 to nearly 8% today in Europe, with U.S. markets following a similar trajectory. As MSCI’s latest analysis found, by Q4 2024, 58% of buyout holdings were sitting in ‘tight, tapped-out, or breach zones’ of their leverage capacity — meaning they have little or no room to take on additional debt to fund growth, pursue acquisitions, or return capital to investors. Around 45% of holdings were in outright breach of leverage headroom — more than triple the 2010-2019 historical average of 13%.

“By Q4 2024, 58% of buyout holdings were in tight, tapped-out, or breach zones of their leverage capacity — meaning they have little room to pursue growth.”  — MSCI, 2025

The human and business consequences of that financial pressure aren’t abstract. When debt covenants and cash sweep provisions channel a company’s free cash flow to creditors rather than back into the business, capital expenditures suffer, R&D gets cut, and worker training disappears. According to University of Chicago Business Law Review research, companies owned by private equity have been found to have significantly higher rates of bankruptcy and financial distress compared to peers — with privately equity-owned companies accounting for 16% of all U.S. bankruptcy filings in 2023. Red Lobster is an often-cited example: excessive debt accumulated under private equity ownership contributed directly to its collapse.

And beyond the outright bankruptcy cases, there’s a quieter, more insidious cost: the innovation that never happens because a company is too leveraged to take risks. When management teams are focused on servicing debt rather than building for the long term, the time horizon for decision-making collapses. Research programs get shelved. Product bets that might pay off in five years get passed over for efficiency plays that show up in this quarter’s EBITDA. That’s not innovation — it’s extraction.

The Founder Control Problem: When Capital Comes at the Cost of Vision

The leverage issue in private equity and the control issue in venture capital are related problems with different mechanisms. In PE, the lever is debt. In VC, the lever is term sheet structure — and the founders who don’t read those term sheets carefully enough often discover, sometimes years later, that they no longer control the company they built.

The modern venture capital term sheet is a sophisticated document designed, first and foremost, to protect the investor’s downside. Liquidation preferences — which determine who gets paid first and how much when a company is sold or liquidated — are perhaps the most consequential and least discussed element. In a standard 1x non-participating liquidation preference, investors get their money back before common shareholders see a dime. In a participating preferred arrangement — which appeared in 83% of term sheets in 2023, up from 71% the year before — investors get their money back AND participate in the remaining proceeds. A founder who negotiates what looks like a strong valuation but accepts participating preferred terms can find themselves walking away from an exit with far less than expected, simply because the math works that way.

Board control is the other battlefield. Investor board appointments appeared in 79% of venture term sheets in 2023. At early stages this is often reasonable — investors bring genuine value, network access, and strategic guidance. But as company after company has discovered, an investor-controlled board can override founder decisions on hiring, strategy, acquisition offers, and exit timing. The most famous example is arguably the forced departure of Travis Kalanick from Uber — a founder pushed out of his own company by his investor board despite holding significant equity. Less famous are the thousands of less dramatic cases where a founder’s strategic vision gets diluted, redirected, or quietly overruled because the capital structure gave investors effective control.

Anti-dilution provisions add another layer of complexity. These clauses — present in roughly 70% of Series A through C term sheets — protect investors from the economic impact of a ‘down round,’ adjusting their share conversion ratios if a company raises new capital at a lower valuation. In a worst-case ‘full ratchet’ scenario, a down round can dramatically wipe out founder equity. Zenefits learned this the hard way in 2015 when a $500 million Series C included full ratchet anti-dilution provisions that came back to haunt the company when its valuation cratered.

“An investor-controlled board can override founder decisions on hiring, strategy, acquisition offers, and exit timing. The most famous example is Travis Kalanick, pushed out of Uber by his own investors.”

The cumulative effect of all these structural features — liquidation preferences, board control, anti-dilution protection, drag-along rights, protective provisions giving investors veto power over major decisions — is that private capital often comes with an invisible cost: the erosion of the founder’s ability to run their own company on their own terms. For many founders, by the time they’ve raised a Series C or D, they are minority shareholders in their own business with limited board influence and a term sheet structure that has effectively transferred control to their investors.

This matters for innovation in a way that’s hard to quantify but easy to observe. Some of the most transformative companies in history — from Amazon’s relentless long-term investment orientation to Apple’s decade-long product bets — required founder-led vision that resisted short-term financial pressure. Jeff Bezos famously ran Amazon at minimal profit for years while investing in infrastructure that most investors would have pressured him to cut. Had Amazon been a typical PE portfolio company with a 74-cents-of-debt-per-dollar capital structure and quarterly distribution targets, AWS might never have existed.

The question worth asking is how many companies with genuine transformative potential have been pruned back, redirected toward near-term profitability, or simply cashed out in a strategic acquisition before they reached their potential — because the capital structure demanded it. We’ll never know the full answer, but the pattern is worth acknowledging: a system that concentrates innovation capital in the hands of a small number of large private funds, and that uses leverage and term sheet mechanics to extract maximum value on a 5-to-7-year fund cycle, is not structurally designed to incubate patient, long-horizon innovation.

“A system that concentrates capital in large private funds and uses leverage and term sheet mechanics to extract maximum value on a fund cycle is not designed to incubate patient, long-horizon innovation.”

What Needs to Change

The problems here didn’t happen by accident and they won’t be solved accidentally either. The regulatory accumulation that drove up the cost of being public was well-intentioned — Sarbanes-Oxley came after Enron and WorldCom; Dodd-Frank came after the financial crisis. But the unintended consequences have been severe, and the costs have fallen disproportionately on smaller companies and smaller investors.

The INVEST Act represents a genuine bipartisan acknowledgment that the current structure isn’t working. Among its provisions: raising crowdfunding thresholds, expanding qualifying venture capital fund size and investor caps, reducing IPO registration requirements for emerging growth companies, and modernizing the accredited investor definition. These are meaningful reforms, and the 302-123 House vote suggests there’s real appetite for change.

But legislation alone isn’t the answer. The consolidation of the broker-dealer industry has eliminated a critical layer of market infrastructure — the regional and boutique firm with deep expertise in smaller companies and genuine relationships with growth-stage management teams. Rebuilding that infrastructure, or creating its functional equivalent in a technology-enabled environment, is a longer-term challenge that regulation can enable but can’t manufacture.

The United States built the world’s deepest and most dynamic capital markets over the 20th century in part because it had a remarkably distributed network of market participants — thousands of broker-dealers, tens of thousands of registered reps, and thousands of public companies spanning every size and sector. That distribution created competition, price discovery, and genuine access for ordinary investors. The trend of the past three decades has been toward concentration — and concentration, as any economist will tell you, is the enemy of efficiency.

The question isn’t whether we can reverse those numbers back to 1996 levels. We can’t, and probably shouldn’t try. The question is whether we can rebuild a functioning pathway for growth-stage companies to access public capital — and for ordinary investors to participate in the genuine upside of American innovation — before the window closes entirely.

“The United States built the world’s deepest capital markets in part because of a remarkably distributed network of participants. That distribution is now in serious decline.”