Industry professionals told an SEC forum earlier this week that regulation is not the key to the declining US IPO market, citing instead globalization, the strength of foreign exchanges, greater access to private funding, industry consolidation and a drop in small-cap offerings.
Their comments came as the Trump administration and new SEC chair Jay Clayton consider ways to encourage more companies to go public, with lowering regulatory hurdles widely reported to be on the agenda. ‘US-listed IPOs by non-US companies have slowed dramatically… As a result, investment opportunities for Main Street investors are more limited,’ Clayton said in prepared remarks for his March 23 confirmation hearing before the Senate Banking Committee. ‘Here, I see meaningful room for improvement.’
The US was the IPO capital during the 1990s, accounting for an average of between 30 percent and 50 percent of deals. That number has persistently fallen since 1997, with the US now accounting for just 10 percent of IPOs worldwide.
Speaking at an event co-hosted by the SEC and New York University’s (NYU) Salomon Center for the Study of Financial Institutions, commission member Michael Piwowar said regulation may have played a part in the falling number of US IPOs. He pointed to the Sarbanes-Oxley Act and the Jumpstart Our Business Startups (Jobs) Act as two laws that may have had a stifling effect.
Other causes
But industry leaders in the room talked about many other causes ahead of the rule book. ‘I don’t think regulation is the cause of the issue,’ said Steven Bochner, partner at Wilson Sonsini Goodrich & Rosati. ‘It’s part of the issue, but not the cause.’
Chris Cooper, global CFO and chief compliance officer at Sequoia Capital, agreed and said the consensus based on conversations he has had recently with public companies is that ‘the regulatory requirement to get them listed has, for sure, made them a better operating company.’
The decline in the number of US IPOs, which peaked in 1997, pre-dates Sarbanes-Oxley – passed in 2002 – and the Jobs Act – passed in 2012 – as René Stulz of the Ohio State University pointed out.
‘The availability of alternative sources of capital, such as private equity, hedge funds and even mutual funds, means private firms may be able to finance growth without having to go public,’ Piwowar said. ‘The emergence of trading venues that provide liquidity for privately held shares has had the same effect.’
Small-cap IPOs have particularly fallen in numbers over the last two decades, according to data presented by Stulz, Alexander Ljungqvist of NYU and Roni Michaely of Cornell University. In the 1980s and 1990s, companies with revenue of less than $30 million accounted for an average of 60 percent and 30 percent of all US IPOs, respectively. Since 2000, the average number of annual small-cap IPOs has fallen to 10 percent of all deals.
‘Changes in the economic environment due to globalization, along with the ‘winner takes all’ trend in some industries, means firms have to get bigger faster to improve profitability, and therefore may prefer being acquired by a large company instead of growing organically,’ Piwowar said. ‘Macroeconomic factors, such as cheaper debt financing and increased mergers and acquisitions activity, may also play a role.’
Frank Hatheway, chief economist at Nasdaq, agreed: ‘We think the way the US markets are set up today [is] very good for larger companies and less good for smaller companies.’ He added that he was looking forward to discussing how to move away from a ‘one size fits all’ approach to public markets.
