Two recent articles in The Wall Street Journal highlight the current challenges in the initial public offering (IPO) market. The first, an editorial captioned “Where Are the IPOs?” appearing on Monday, January 2, 2017 (updated), reports that “111 companies have gone public on U.S. exchanges in 2016, raising $24 billion, the lowest total in more than a decade. This is odd, as bullish markets normally encourage potential IPO candidates to offer their shares to the public.” The editorial then asks, “So why aren’t more companies going public?”
The second piece, entitled “Investors’ Lament: Fewer Public Listings – Gusher of private capital, IPO slump and mergers reduce buying options” appearing on Thursday, January 5, 2017, takes a stab at answering this question. Companies of this generation, it argues, have shunned public markets because big investment funds seeking higher returns (rather than accepting record low interest rates) are showering private companies with cash, and private funding markets have taken on attributes of public equity, such as an ability to award employees shares that they can trade in alternative markets and to provide investors with a better view of a private company’s financial statements including through quarterly conference calls, without enduring the regulatory burdens of going public.
Essentially, it appears that the balance between going public and staying private has tilted towards the latter so that many later-stage private companies see no great advantage to becoming publicly held as they may have once believed.
The Wall Street Journal editorial is concerned though – “The lack of new public firms is . . . occurring in an era when the U.S. has been creating fewer businesses . . . [a]nd that means a critical job-creation engine is sputtering.” Accordingly, the editorial ends as follows:
Promoting a revival in business creation should be a top priority of the Trump Administration.
Whether it’s a Silicon Valley technology start-up backed by venture capital or a dry cleaner funded
by a family of savers, American workers need them and myriad other new enterprises.
The second piece goes even further with the potential effects of a slower IPO market, suggesting it adds to perpetuating inequality in our society. The current state of the IPO market is “putting some of the best investing prospects out of the reach of ordinary Americans.” Continuing:
The stock market once offered a way for average investors to buy into the fastest-growing
companies, helping spread the nation’s wealth . . . [, but] the equity market has become bifurcated,
with a private option available to select investors and a public one that is more of a last resort for
companies.
In rebalancing the IPO equation, The Wall Street Journal editorial focuses on “regulatory friction” and the need to further ease the regulatory burden on companies going public (recognizing, however, the reforms and upswing in the market following the enactment of the JOBS Act in 2012).
The second piece is more guarded in this respect. Here, the problem is not necessarily regulation. The problem – and this is especially present in the case of smaller public companies – is that being public is “dangerous.” These dangers include orphan status with limited after-market trading volume and analyst coverage, an investor base that looks only for short-term stock gains, SEC disclosure rules that jeopardize sensitive, competitive business information and exposure to SEC investigations and class-action lawsuits even when baseless.
Securities lawyers have spent the past several years discussing the causes and suggested remedies for the IPO slump. The Wall Street Journal has effectively focused on perhaps a key conclusion – that while deregulation helps, the SEC needs to again make “going public” the pinnacle of corporate success by taking steps to reduce the dangers of being public that are apparently perceived by many later-stage private companies. Perhaps the announcement of the Trump Administration’s nominee for SEC Chairman, Jay Clayton, is a step in that direction.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...