Facebook’s looming initial public offering is just the latest in a nine-month series of blockbuster tech IPOs, rekindling memories of the go-go markets of the late 1990s. Ahh, good times — at least until the markets tanked. A closer look, though, reveals that the similarities to the dot-com era don’t extend very far. In fact, the latest IPOs spotlight a problem with the system: Too few companies are going public, and they’re waiting too long to do so.
Researchers say that start-up companies have been responsible for 100% of the job growth in the United States since the late 1970s, and that the vast majority of the jobs created by new companies arrived after their IPOs. Those statistics make a powerful argument that IPOs can serve the public’s interests as well as those of company executives and venture capitalists.
Since the tech-stock bust, though, the number of IPOs has dropped precipitously. That’s particularly true for companies not chasing headline-grabbing sums. Offerings of less than $50 million used to dominate, but now they account for a small fraction of the IPOs. Start-ups of all sizes have been opting more often to sell themselves to larger companies rather than going public as stand-alone entities, a path that typically leads to fewer jobs being created.
One factor at work is the sharp increase in the cost of becoming and operating a public company. In the wake of the mind-boggling frauds at Enron and Worldcom, Congress enacted the Sarbanes-Oxley Act to mandate more disclosure and better safeguards against accounting legerdemain. As important as those protections are, they impose such high compliance costs that they deter companies from going public at least until they’re no longer small. That means the general public may not have the chance to invest until after a company has experienced its biggest growth spurt. Instead of being broadly shared, the gains from that growth will be captured by a more narrow group of angel investors, venture capitalists and other insiders. That trend should trouble anyone concerned about the widening wealth gap in America.
President Obama wants to encourage companies to go public sooner by giving them up to five years after an IPO to comply with some of the costliest new securities regulations, and by simplifying the paperwork for offerings of up to $50 million. He’s also proposed a “crowd funding” rule that would let entrepreneurs raise up to $1 million annually from small investors without the regulatory burdens of an IPO. The House approved the latter two proposals in November by overwhelming margins, and the five-year phase-in has bipartisan support as well. All three ideas can help create jobs, and lawmakers should enact them.