Grant Thornton Study: Scary Numbers On The Decline Of US IPOs
The lack of IPOs is harming the cycle of innovation in Silicon Valley but if you look beyond our region, it's effect is much larger.
Grant Thornton, a large accounting firm, has published a study that shows the connection between IPOs and the health of the US economy.
And it shows how new listings in Asia are helping to shift wealth and competitiveness outside of the US.
Here are some of the findings:
The scale of the decline in IPOs:
- Just 12 companies went public in the US in the first half of 2009 - 4 were non-US.
- 1997 was a peak year for IPOs, since then it has declined 39% (55% decline if adjusted for GDP growth.)
- Asian growth in new listings is far higher than its GDP growth.
- Hong Kong new listings have doubled since 1997, tripled since 1991.
The US is losing the number of listed companies:
- Just to maintain US listings at the current level would require 360 new listings a year - a level not reached since 2000. There were only 54 in 2008 and an average of 166 a year since 2001.
- The US would require 520 new listings a year to keep pace with GDP growth of 3%.
The study claims the US has lost 22 million jobs because of the lack of new listings.
Pascal Levensohn, Board Member of the National Venture Capital Association (NVCA):
"The inability for emerging growth companies to access U.S. public equity capital by completing IPOs below $50 million inhibits job creation and hurts American entrepreneurs more than any other group. Starved for long-term risk capital in the U.S., the next generation of innovative private enterprises will continue to move to non-U.S. emerging innovation hotspots, where startups are nurtured through attractive capital incentives, if we can't repair the bridge into public markets."
The study offers a long list of possible solutions. Here are some:
- Create an alternative public market segment
A public market solution that provides an economic model that supports the "value components" (research, sales and capital commitment) in the marketplace. It requires a parallel market segment that leverages a fixed spread and commission structure.
- Make enhancements to the private market
A private market solution that enables the creation of a qualified investor marketplace - consisting of both institutional investors and large accredited investors.
- Free companies to market their securities more broadly
Eliminate SEC or statutory restrictions on "general solicitation" or "general advertising," provided the ultimate purchasers are "qualified" investors. Permit companies and analysts to have media discussions of company performance and news...allow investment companies and ERISA accounts to invest a larger portion of their assets in unregistered securities.
- Overhaul verification of QIBs and accredited investors
Rather than requiring the company or private placement agent to verify, shift the burden to the investor to self-qualify (subject to liability for misstatements) for the new private placement market.
- Exempt companies from SEC registration
Permit holding of companies' shares by an unlimited number of qualified shareholders (eliminating the 500-shareholder and the 100-accredited-investor limitations).
- Self-regulate trading spreads
To attract capital and promote liquidity, this new market must create and preserve economic incentive for its constituents. Allow the market to set minimum quoted spreads and commissions.
- Exempt market participants from holding period
Exempt new market participants from holding period restrictions, and remove the obstacle requiring market participants to purchase unregistered securities with "investment intent." The "investment intent" requirement hinders the development of private markets, and is unclear and at odds with the very notion of what a market participant is supposed to do.
- Encourage centralized information, control and custody systems Companies should seek out marketplaces that provide systems to support the management and delivery of appropriate disclosure information, and that facilitate the tracking and delivery of shares.
-Research permitted to work with banking
As a market for "qualified investors," research analysts would be permitted to work with investment banking and be compensated on investment banking business, rather than be barred by FINRA Rule 2711 and the Global Research Settlement.
There is no doubt that the lack of IPOs is harming the economy. However, this study appears to be an excuse to drive large changes in regulations governing the stock market and investments.
This will be difficult to do given the current lack of trust in Wall Street and its enthusiasm to exploit any arbitrage opportunity no matter the cost to society.
There would be plenty of new loopholes for Wall Street to discover with such a large number of new rules.
Also, there is nothing said about changing Sarbanes-Oxley. This is a huge burden on young companies and it is one of the largest obstacles to an IPO.
It would be far better to leave the stock market and investor regulations in place and to focus on reforming Sarbanes-Oxley.
This would be a much faster strategy in opening the door to new IPOs than persuading Congress to pass the many changes in stock market regulations that the study's sponsors have requested. There's little chance of that happening.
You can see the whole study here.