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A welcome attempt to restore the appeal of initial public offerings in America
Mar 31st 2012 | from the print edition
HAVING spent years heaping new rules onto its financial markets, America is
about to take a modest step in the opposite direction. On March 27th Congress
passed the JOBS (or, rather ludicrously, Jumpstart Our Business Start-ups )
Act, which aims to revive growth by easing the regulatory burden on companies
seeking to raise capital (see article).
The act is designed to address the decline in initial public offerings (IPOs).
From 2001 to 2011 the annual tally of small companies going public in America
was 80% lower than in the previous two decades.
The IPO drought does not mean firms cannot raise capital. There are plenty of
other ways for them to do so, from private equity and private placements to
bank loans. But the public markets serve a unique purpose: they provide capital
directly to young, growing firms, give early investors a means to cash out and
enable ordinary investors to stake a claim in the fortunes of those firms.
There are many reasons for the drought. Rich-world economies are not exactly
fizzing, and firms from emerging markets that once sought respectability by
listing in the West now have options at home. But onerous regulations are also
to blame.
America has more than its fair share of those. From Sarbanes-Oxley to
Dodd-Frank, policymakers have responded to crisis and scandal with ever more
strictures on accounting, auditing, pay, governance and Wall Street research.
Some of this was needed to make markets work better. By bolstering investors
confidence in the marketplace, regulation can help companies raise capital. But
too many new rules impose costs that exceed their benefits: the intensive
review of internal controls required by Sarbanes-Oxley is one example among
many.
Bosses of listed firms gripe that they spend more time complying with rules
than cooking up new products. More worryingly, firms that in previous decades
might have gone public look at the red tape and decide not do so. Start-ups
used to dream of toppling incumbents; now they aim to sell themselves to Google
or Apple. Creative destruction is muffled.
Two cheers for the deregulators
The JOBS Act would make it easier for young, growing companies to go public by
releasing them from some of the auditing oversight requirements of the 2002
Sarbanes-Oxley Act. It would loosen the restrictions on communication between
companies about to go public and investors, on underwriters research, and on
the advertising of new share offerings.
Such steps would reduce compliance costs while providing investors with more
information. Alas, other parts of the law deprive investors of helpful
disclosures. A young firm could release just two years of audited statements
instead of three, and a private firm could avoid registering its shares with
the Securities and Exchange Commission (which triggers broad disclosure
requirements) until it has 2,000 shareholders, up from the current 500. This
would allow far too many companies that are, de facto, publicly held to evade
disclosure and, perversely, reduce the incentive to go public.
The law also goes too far in waiving most registration requirements for firms
that crowdfund (ie, raise small amounts of money from lots of investors over
the internet). Crowdfunding is an efficient way for entrepreneurs to raise seed
capital. But it is also a good way for hucksters to fleece suckers. The Senate
wisely inserted modest disclosure requirements. More safeguards are needed,
especially in the case of the brokers who sell the shares.
The JOBS Act is not perfect. But it starts to cut the rules that cuff American
capitalism and should thus be applauded.
from the print edition | Leaders