It might be hard to believe, but it’s been almost 20 years since online auction provider eBay made its initial public offering (IPO) in the capital markets. With that step in September 1998, eBay made the leap from “promising start-up” to “e-commerce giant.”
Since then, eBay has grown into a multibillion dollar company, creating tens of thousands of jobs and facilitating countless transactions between buyers and sellers all over the world. The scope of this one company’s economic impact would be hard to measure. If we were to extend that analysis to the impacts of other public companies, it would make it clear how important the public offering process is to the U.S. and world economies.
The problem is that the number of public companies has declined, as fewer companies take the steps needed to access deeper pools of capital through financial markets. That decline represents a challenge for the broader U.S. economy, which relies upon a vibrant and dynamic business sector to establish and expand new firms on a regular basis.
The decline in the number of public companies stems from a variety of contributing factors. Now an alliance of organizations representing the financial markets, investors and business leaders has launched a new campaign to encourage reform of the IPO process to encourage more companies to go public.
In a white paper issued in April, several leading business and financial industry organizations presented a diagnosis and prescription to reverse the decline in public companies. The paper, titled “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public,” offers recommendations in five key categories aimed at improving capital formation and boosting opportunities for both entrepreneurs and investors, while continuing to ensure that investors enjoy strong protections.
“Unfortunately, regulatory burdens and antiquated laws are unduly hampering capital formation for these businesses generally and may also be reducing investors’ access to investment opportunities,” said Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA), one of the organizations that developed the new report. “As they have for the past few years, SIFMA members believe policymakers should continue to reassess existing regulations to allow more businesses to readily access U.S. capital markets while maintaining important protections for investors.”
Along with SIFMA, the other organizations involved in publishing the “Expanding the On-Ramp” report include the American Securities Association; the Biotechnology Innovation Organization; the Equity Dealers of America; NASDAQ; the National Venture Capital Association; Technet; and the U.S. Chamber of Commerce Center for Capital Markets Competitiveness.
The benefits of public companies
When a company goes public through an IPO, it gains access to the deep and liquid pools of capital available from a wider variety of institutional and individual investors in the financial markets. Start-up founders, early investors and venture capitalists are not the only ones who benefit from a successful IPO. Companies going public and acquiring the capital they need to grow can have a significant impact in the broader economy.
Studies have shown that public companies are key to broad job creation. University of Florida Professor Jay Ritter, an expert on IPOs, testified to Congress in 2012 about his findings in a wide-ranging study of more than 2,000 firms. Those that underwent IPOs between 1986 and 2000 added an average of 822 employees after going public.
The “pay-off’ that entrepreneurs and early investors get from an IPO, as a reward for their risk-taking, also serves as an incentive for innovation. In turn, that greater innovation is a boost for the economy as a whole and for consumers. Just think of how a retailer like Wal-Mart drove down costs and revolutionized the retail experience by rethinking logistics and distribution, or how Apple changed the worlds of computing, digital music and cell phones through a series of technological breakthroughs.
The decline of the public company
Unfortunately, the number of public companies has been shrinking for two decades or more, as the “Expanding the On-Ramp” report notes:
Regrettably, over the years, the public company model has become increasingly unattractive to businesses: the United States is now home to roughly half the number of public companies than existed 20 years ago, while the number of public companies in the United States is little changed from 1982.
Fewer public companies means fewer opportunities for creating jobs and wealth for Americans. It’s a trend that needs to be turned around.
There are a variety of factors that have contributed to this dynamic of decline. But most experts agree that stifling regulations, administrative burdens and high costs of the IPO process have played a key role in the slowdown. As a result, some companies today have elected to remain private so that founders can retain control, or may seek a merger or acquisition from a larger company rather than subject themselves to the rigorous IPO process. For these companies, going public may be now seen as more costly than beneficial.
In 2012, Congress passed and President Obama signed the Jumpstart Our Business Start-ups (JOBS) Act, which included significant reforms to the regulations and process governing IPOs. That was a good first step—but more extensive action is clearly needed.
To more fully determine the scope of the problem, President Trump tasked the Treasury Department in February 2017 with the job of reviewing existing financial regulations and preparing a blueprint for reform. The Treasury report, issued in October 2017, detailed a number of regulatory reform priorities needed to encourage more public companies.
Many of the priorities detailed in the Treasury report are reflected in the “Expanding the On-Ramp” paper. The “Expanding the On-ramp” recommendations cover five broad categories:
- Enhancing the JOBS Act to build upon the strengths of the earlier legislation
- Encouraging more research of emerging growth companies (EGCs) and other small public companies
- Improving corporate governance, disclosure, and other regulatory requirements to ease the IPO process
- Streamlining the financial reporting process for EGCs
- Tailoring equity market structure to better serve the capital needs of small public companies
For a detailed discussion of the specific policy proposals in each of these broad categories, read the full report.
As the report emphasizes, these problems developed over time and won’t be fixed overnight. But they do represent a starting point for IPO reform that promises to reinvigorate the public company model. Tom Donohue, chairman of the U.S. Chamber of Commerce, explained in a recent speech that measures such as these will go a long way toward solving “the crisis of the vanishing IPO.”
“If we fix these factors, we’ll see a resurgence in IPOs that will create millions of new jobs, plentiful opportunities for mom-and-pop investors to get a great return on their investment, and a stronger, more vibrant, and more innovative economy,” Donohue said.