2012-04-03 11:27:19
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