Venture Industry Calls for Rules Changes to Reopen IPO Market
There was a time when most growing companies went to the public stock markets for the capital they needed to keep hiring and growing—but that time ended a decade ago. At no point since 2001 has the number of initial public offerings per year reached even the minimum levels set in the 1990s. (The pre-1999 average was 547 IPOs per year; post-1999, 192 per year.) In fact, some analysts peg the number of jobs lost or not created due to the IPO decline at 22 million—which, perhaps not coincidentally, is roughly the same number of people who are unemployed or stuck in part-time jobs today.
Back in 2008—when, for the first time in three decades, an entire quarter went by without a single IPO—the National Venture Capital Association issued a report calling the IPO decline a “crisis for the start-up community.” The darkest days of the 2008-2009 economic crisis are now behind us, but IPOs haven’t bounced back even to their tepid pre-2008 levels.
So the venture industry has gone back to work. An independent group of venture capitalists, CEOs, lawyers, academics, and investment bankers calling itself the IPO Task Force issued a report today (PDF) that blames the IPO crisis on a series of regulatory changes in Washington, D.C., and calls on lawmakers and regulators to ease the rules that make an IPO such a risky, expensive hassle for young companies.
The IPO Task Force, which is chaired by Scale Venture Partners founder Kate Mitchell (an Xconomist), said it doesn’t want to overturn regulations designed to protect investors, such as the Sarbanes-Oxley rules put in place in 2002 to govern corporate financial reporting and prevent future Enron-like accounting scandals. But it said that that its recommendations would “adjust the scale of current regulations without changing their spirit.” Taking these “reasonable and measured steps,” the task force argues, would “reconnect emerging companies with public capital and re-energize U.S. job creation and economic growth.”
For the venture industry, of course, the unspoken benefit of a new wave of public offerings would be to boost fund returns and unfreeze the enormous amounts of private capital currently locked up in pre-IPO companies.
The task force was formed this spring after the U.S. Treasury Department convened an “Access to Capital Conference” to gather recommendations on how to get more small companies through the IPO process. The group’s four recommendations—which are addressed mainly to the Treasury Department, the SEC, Congress, and the White House—are fairly technical, and it’s hard to boil them down. But here’s a quick overview. (The IPO Task Force summary slides and the full report are embedded below.)
1. Give “emerging growth companies”—those with revenue of less than $1 billion at the time of an IPO—five years to gradually meet the SEC financial reporting requirements imposed on public companies by Sarbanes-Oxley rules and other regulations. Compliance costs amounting to $2.5 million to $4 million per year are a big deterrent to going public for small and medium-sized companies, the task force said, and giving companies a gradual “on ramp” to full compliance could cut these costs by 30 to 50 percent.
2. Ease restrictions on the activities of research analysts employed by broker-dealers such as investment banks, as a way to get more information to potential IPO participants, especially non-institutional investors who don’t have their own research departments. Rules designed to curb the rampant conflicts of interest in the 1990s, when researchers routinely became shills for the the stocks their banks were promoting, have had the effect of leaving all but the biggest investors in the dark in the periods immediately before and after an IPO, the task force argued. (Related to the issue of pre-IPO disclosures, the task force recommended that the S-1 registration statements filed with the SEC by companies intending to go public be kept confidential until after the SEC’s initial review, to give companies time to work out the kinks in their applications.)
3. Give investors a capital-gains tax break for holding on to a stock for at least two years after an IPO. It’s common for investors to wait until after an IPO, to see whether a stock is trending up or down, before they start trading. If investors knew they’d get a tax break down the road for investing in the initial IPO allocation at the opening price, the companies themselves would presumably collect more capital.
4. Arm pre-IPO companies with better strategies for negotiating the hazards of going public. The task force addressed this recommendation not to lawmakers or regulators, but to “members of the emerging growth ecosystem,” including companies’ venture investors, board members, and advisors. The task force noted, for example, that companies should choose their investment bankers carefully, searching out those interested in encouraging their long-term growth rather than simply profiting from short-term trading.
Mitchell, the task force chairwoman, said in a statement today that the four recommendations are “extremely targeted” and that they would scale back existing regulations in a reasonable way without endangering investors. “Given the urgency of getting America back on the path to economic growth, we need to get capital back in the hands of companies that create jobs,” Mitchell said. “History tells us that emerging growth companies do exactly that.”
Here are the IPO Task Force summary slides, followed by the full report.