Recently there has been much comment about the declining numbers of initial public offerings in the United Kingdom and the United States. That concern is exemplified by this article in the Financial Times of 13 November 2011 (“A market less efficient: Drop in listings fuels concerns that exchanges ceasing to channel capital”) and is also seen in a recent report for the City of London Corporation which we discussed in this post.
Responding to this concern, in March 2011 the US Treasury Department convened the “Access to Capital Conference” on how to promote access to public capital though the IPO market. Out of that conference a group of professionals describing itself as “representing the entire ecosystem of emerging growth companies – venture capitalists, experienced CEOs, public investors, securities lawyers, academicians and investment bankers” formed an “IPO Taskforce” to:
“examine the conditions leading to the IPO crisis and to provide recommendations for restoring effective access to the public markets for emerging, high-growth companies”.
The Taskforce presented its report to the US Treasury on 20 October 2011. The report can be read here.
Causes of the decline of the IPO market
In analysing the reasons for the drop in the numbers of IPOs in the US, the Taskforce:
“concluded that the cumulative effect of a sequence of regulatory actions, rather than one single event, lies at the heart of the crisis. While mostly aimed at protecting investors from behaviors and risks presented by the largest companies, these regulations and related market practices have:
1. driven up costs for emerging growth companies looking to go public, thus reducing the supply of such companies,
2. constrained the amount of information available to investors about such companies, thus making emerging growth stocks more difficult to understand and invest in, and
3. shifted the economics of the trading of public shares of stock away from long-term investing in emerging growth companies and toward high-frequency trading of large-cap stocks, thus making the IPO process less attractive to, and more difficult for, emerging growth companies.
These outcomes contradict the spirit and intent of more than 75 years of U.S. securities regulation, which originally sought to provide investor protection through increased information and market transparency, and to encourage broad investor participation through fair and equal access to the public markets.”
To counter the declining numbers of IPOs, the Taskforce makes four recommendations:
“1. Provide an “On-Ramp” for emerging growth companies using existing principles of scaled regulation. We recommend that companies with total annual gross revenue of less than $1 billion at IPO registration and that are not recognized by the SEC as “well-known seasoned issuers” be given up to five years from the date of their IPOs to scale up to compliance. Doing so would reduce costs for companies while still adhering to the first principle of investor protection.
2. Improve the availability and flow of information for investors before and after an IPO. We recommend improving the flow of information to investors about emerging growth companies before and after an IPO by increasing the availability of company information and research in a manner that accounts for technological and communications advances that have occurred in recent decades. Doing so would increase visibility for emerging growth companies while maintaining existing regulatory restrictions appropriately designed to curb past abuses.
3. Lower the capital gains tax rate for investors who purchase shares in an IPO and hold these shares for a minimum of two years. A lower rate would encourage long-term investors to step up and commit to an allocation of shares at the IPO versus waiting to see if the company goes public and how it trades after its IPO.
In addition to its recommendations for policymakers, the task force has also developed a recommendation for members of the emerging growth company ecosystem:
4. Educate issuers about how to succeed in the new capital markets environment. The task force recommends improved education and involvement for management and board members in the choice of investment banking syndicate and the allocation of its shares to appropriate long-term investors in its stock. Doing so will help emerging growth companies become better consumers of investment banking services, as well as reconnect buyers and sellers of emerging company stocks more efficiently in an ecosystem that is now dominated by the high-frequency trading of large cap stocks.”
The Taskforce’s report is a comprehensive piece of work; it would be good to see a similar initiative lead by the growth company community – in whose interest it is to have an efficient and functioning public capital market – in the UK.
UPDATE 5 December 2011: The “Reopening American Capital Markets to Emerging Growth Companies Act” has now been proposed in response to the Taskforce’s report, as we discuss in this post.
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