The Wall Street Journal points out that a number of start-ups hold illiquid auction-rate securities. Edward Wes, a partner with the law firm Perkins Coie told the paper, "The private companies need liquidity more, because they're burning cash faster than public companies."

While these new companies face a huge problem, many of them are backed by large VC firms who could loan them money against the securities in anticipation that the market will become liquid again.

Small public companies have a worse problem. They do not have one or two firms who can step in. If their balance sheets have a lot of this paper, what do they do? Several large companies like Bristol-Myers (NYSE:BMY) have said they may have to take writes-offs because of their auction-rate holdings. But companies that size have the balance sheets and borrowing power to weather the storm.

For shareholders in small-cap and mid-cap public companies, the end of the first quarter of this year may be unpleasant as firms write-down the value of auction-rate paper and take P&L hits. It could bring a lot of small company share prices down.

Douglas A. McIntyre is an editor at 247wallst.com.