Friday, May 12, 2017

Experts examine dynamics of downward trend in U.S. IPOs

By John Filar Atwood

When looking for reasons for the drop in initial public offerings (IPOs) in the U.S. over the past 15 years, do not blame over-regulation. This was the view presented by a number of experts at the SEC-NYU dialogue on securities market regulation, the focus of which was how to revive the U.S. IPO market.

Chris Coper, global chief financial officer of Sequoia Capital, said that CEOs tell him regulation, including the oft-blamed Sarbanes-Oxley Act (SOX), is not a hurdle to going public. Most of them say that it would be great if it were easier and cheaper to go public, he continued, but they also acknowledge that SOX has made them a better company.

Steven Bochner, a partner at Wilson Sonsini Goodrich & Rosati, said that it has been his experience that companies want to take the value-maximizing path whether that is an IPO or not. “Regulation is part of the issue, but not the major issue,” he said. Bochner’s view was supported by research presented by Ohio State University finance professor Rene Stolz, which indicated, among other things, that regulatory costs are not a big part of the story behind the collapse of listings in the U.S.

Piwowar comments. The remarks addressed the question posed by SEC Commissioner Michael Piwowar in his opening statement about whether SOX and other regulatory changes may have contributed to the downward trend in IPOs. He also pointed to decimalization, Regulation NMS changes to the economics of market-making for small company stocks, and modifications to the Section 12(g) shareholder threshold introduced by the JOBS Act as possible contributors to the lower IPO numbers.

Piwowar noted that since 2000, the average annual number of IPOs is 135, less than one-third of the average annual number of IPOs (457) in the 1990s. The decline is primarily driven by the disappearance of small IPOs, he said, noting that in the 1980s and 1990s, IPOs with proceeds of less than $30 million constituted approximately 60 percent and 30 percent, respectively, of all IPOs. That trend reversed in the 2000s, and new issues with proceeds less than $30 million accounted for only 10 percent of all IPOs between 2000 and 2015, he added. In contrast, large IPOs increased from 13 percent of all new issues in the 1990s to 45 percent since then.

Lack of institutional support. Stolz’s research supported Piwowar’s statement about the drop in the number of small companies in the public markets. “Institutional investors will not invest in companies with under $30 million in market cap, so the market is tilted toward large companies,” Stolz said.

Bochner agreed, noting that it is not even a consideration in Silicon Valley for a company with under $30 million in market cap to go public. Institutional investors expect a higher caliber of company, he said.

Private funding. Panelists pointed to the ready availability of private capital as a factor in the drop in IPOs. Robin Graham, a managing director at Oppenheimer, noted that shift toward companies staying private longer. “There is unprecedented access to capital now, and the markets are healthy so companies are getting the money they need,” he said. “It just happens to be in the private space,” he added. Graham thinks it is positive to have more mature companies completing IPOs and questioned whether we need to revive the IPO market.

In Graham’s view, the primary impediment to going public is time allocation. Company founders and managers are reluctant to allocate 30 percent of their time to managing the aspects of being a public company, he said, particularly when there is plenty of money available in private markets.

Unicorns. Panelists also discussed the large number of unicorns—private companies with more than $1 billion in market cap—and whether they will start to go public soon. Bochner believes the market will see an increase in unicorn IPOs this year. Venture investors need liquidity, he noted, so those unicorns backed by venture capital will have to find an exit.

While the new 2,000-shareholder threshold for public reporting introduced by the JOBS Act has been cited as a contributor to the number of highly-valued private companies, Cooper said it is not really an issue for Sequoia. “We just think about whether a company is ready to go public instead of focusing on the number of shareholders,” he said.

Forcing a company to go public based on number of shareholders is a bad idea, according to Bochner. He favors legislative changes that would exclude accredited investors from the 2,000-shareholder limit. He said he would support a new version of the JOBS Act that included this change.

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