Since the 1980s, the initial public offering (IPO) landscape has morphed from largely U.S.-led transactions to an increasingly global phenomenon. These changes have been driven in part by the political, regulatory and economic evolution of major emerging economies and the recovery and viability of key European markets.
But another critical reason is that U.S. regulation that was intended to improve and stabilize the capital markets has had the opposite effect.
{mosads}It has caused a dramatic decline in the number of U.S. public companies and the number of U.S. companies going public, and a dramatic increase in the average time between formation and an IPO (from seven to 10 years). Simply put, the U.S. risks losing market leadership through overregulation and a lack of innovation.
Thirty years ago, a company could do a cost-effective IPO for $6-8 million. Today, unless a company is raising at least $100 million with a market cap of around $300 million, an IPO generally does not make sense. The reasons for this include the continued institutionalization of the investor base, growing regulation of public companies and the increased litigation and administrative costs for issuers.
Good regulation should be driven by the need to fix poor practice or systemic flaws — and be clear and proportionate. In the case of Sarbanes-Oxley, regulations that sought to improve internal accounting and disclosure controls post-Enron were clearly warranted.
In other cases, regulations directed at social engineering, such as “say on pay,” are not essential to a financial understanding of, and investment decision in, a business. In addition, Dodd-Frank, with its thousands of pages of initial law, and an equivalent amount of regulation, is a perfect example of the reverse.
Many have argued that all that was needed was the reinstatement of Glass-Steagall and to ensure greater diversity among banks by building a system where no bank was too big to fail.
The consequence of ill-considered regulation is that there are only about 5,000 U.S. public companies today, down from over 10,000 in 1980. Not coincidently, there are less than 5,000 banks today, down from over 13,000 in 1980.
In fact, the Federal Deposit Insurance Corporation (FDIC) has issued only seven new bank charters since 2009; in four of those years, no bank charters at all were issued. Vibrant local economies need locally knowledgeable banks.
The declining number of public companies increases securities litigation risks. With a declining number of companies to pursue, the plaintiffs’ bar has filed complaints against ever smaller securities law infractions, even if not material. More plaintiffs’ lawyers focused on fewer companies is never a good result for shareholders.
Today’s economy is being reshaped by technology and digitization, but current securities regulation is not aligned with it, nor does it support the robust capital markets that underpin innovation and capital formation.
To date, the SEC has responded to changes in the economy by introducing more and more amending regulations, carving out niches from the overall monolith of the Securities Act of 1933. This has made the act overly complex because companies must understand when regulations apply to them and when they do not.
The securities laws need to be rewritten from scratch to reflect the reality of today’s investment world. U.S. markets should not only compete with other international capital markets, they should promote U.S. innovation and business growth.
Disclosures should focus on information that is material to today’s investors, avoid social engineering and be available through different media, including webcasts. Investors today do not focus on three years’ worth of comparative financial results — business is moving too fast for that.
They want to know what is happening now and in the future, and they want the disclosures to be made to them through streaming media. There should be a simple set of regulations for companies whose market capitalization is under $100 million and another set for larger companies.
Ultimately, the securities laws that underpin processes like IPOs should prime the economy for the benefit of all stakeholders — including the issuers themselves, institutional and retail investors, the broader market and the national economy.
Greater innovation and access to capital energizes the economy and allows more companies to succeed. This in turn provides more employment opportunities for American workers. This is critical in an age where labor is being curtailed through automation. It is time for the Securities Law of 2020 to make this happen.
Thomas Pollack is a partner in the capital markets practice at Paul Hastings, an international law firm with a client list that includes many top financial institutions.