Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Job Market Back on the Road to Growth
11/11/2011
OUR VIEW OF THE NEWS
The following is a summary of a report titled “Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Job Market Back on the Road to Growth,” which examines the conditions that led to the continuing decline of emerging growth company IPOs in the U.S. and its negative impact on U.S. job growth. The full report, which was recently presented to the U.S. Department of the Treasury, can be accessed here.
J.H. Cohn supports the recommendations contained in this report. For some time, we have believed that the U.S. needs to “jump start” the corporate engines by restoring access to public capital. Jobs—from the most common to the most challenging—make us who we are. Capital, in all of its forms, is the underpinning of job creation and we need to create a more efficient delivery system for the small and medium sized enterprises (SMEs) to access the capital market. SMEs, now more than ever, need capital to stay competitive, and access to it in these times (i.e., “the new normal”) is generally limited to stretching vendors and owner/manager investment. That approach is not sustainable and so we need to think out of the box to find different and more permanent sources of capital so companies will be in a better position to hire, innovate, and grow. The IPO Task Force report, summarized below, addresses much of what American businesses need right now and we hope that policy makers will give it the attention it deserves.
Report Summary
A team of venture capitalists, CEOs, investors, lawyers, academics, and investment bankers examined the conditions that led to the continuing decline of emerging growth company IPOs in the U.S. over the last 15 years and the subsequent decrease in new U.S. jobs. Their findings, as well as recommendations for restoring access to public markets, were presented in the report.
The report indicates that while nearly 2,000 U.S. venture-backed emerging growth companies went public from 1991 to 2000, only 477 went public from 2001 to 2010, a drop of more than 75 percent. Per the chart below, 92 percent of job growth in a company occurs post-IPO.
To understand the concerns, hurdles, and benefits of going public, this “IPO Task Force,”1 through the National Venture Capital Association, surveyed CEOs whose companies were involved in IPOs over the last five years. The survey results show that the average job growth, post-IPO, was 86 percent—further evidence of a strong positive relationship between IPOs and job growth.
The problems identified by the IPO Task Force included regulations and market practices that have driven up costs; increased confusion caused by constrained information available to investors; and an economic shift in public trading from long-term investing in emerging growth companies to high-frequency trading of large-cap stocks.
To help alleviate these obstacles, the IPO Task Force recommends that policy makers:
- Create a new category of “emerging growth company” issuers for companies with less than $1 billion in annual revenue at the time of an IPO registration. Allow this group a scaled compliance “on-ramp” period of up to five years, where investor protection and disclosure would not be compromised;
- Create or update rules to allow pre- and post-IPO research and information flow, eliminate unnecessary restrictions and quiet periods, and permit broader pre-filing investor communications to allow retail investors the same benefits of institutional investors; and
- Lower capital gains tax rate for investors who purchase and hold IPO shares for two years or more.
In addition, the IPO Task Force recommended that the emerging growth IPO ecosystem should help educate issuers to “become better consumers of investment banking services…increase the education and involvement of management and board members about the choice of the investment banking syndicate and the allocation of IPO shares.”
It is the feeling of the IPO Task Force that acting on these changes will benefit entrepreneurs who have developed the types of high-growth companies that would qualify for access to public capital. To access the full report, click here.
If you would like to discuss the contents of this report and/or alternatives currently available for growth capital, please feel free to contact your engagement partner or Dom Esposito, Leader of our Private Equity initiatives, at desposito@jhcohn.com or Rich Salute, Capital Markets and SEC Practice Director, at rsalute@jhcohn.com.
1Note: In March, 2011, the U.S. Treasury Department’s Access to Capital Conference convened in response to growing concerns about the decline of emerging growth companies in the U.S. IPO market. It was from this meeting that this independent IPO Task Force was formed.