Justin Field

by & filed under Capital Formation & Regulation, NVCA Blog, Public Policy.

I hope that you were able to read the press release NVCA sent out yesterday announcing the release of a proposal to encourage more U.S. public companies.  This effort builds off the success of the JOBS Act and is intended to make it more attractive to become and remain a public company.  We were pleased to partner with the U.S. Chamber of Commerce, the Biotechnology Innovation Organization, Nasdaq, Equity Dealers of America and several other organizations to put this package together, and we look forward to working with this coalition to get these ideas passed.

Capital markets reform and reviving the Initial Public Offering (IPO) is one of our top priorities at NVCA.  We believe the blueprint we just released can reverse the trend of the dwindling number of public companies in the U.S.  We also hope this report can spark a further conversation on these issues among our membership as we continue this important work. 

Despite the constant drumbeat of headlines asking whether the IPO window is open or closed and optimism based on recent listings, the structural decline of the IPO market in the long-term has been rather stark.  My colleague Maryam Haque has put together a significant amount of data showing that since 2000, the U.S. has averaged less than half the number of IPOs per year than in either previous decade:  

Source: Initial Public Offerings: Updated Statistics. Jay Ritter, University of Florida, March 8, 2016

The decline has been especially significant for smaller capitalization companies:

Source: Initial Public Offerings. Jay Ritter, University of Florida, January 2016

As a consequence, the U.S. now has approximately half the number of public companies than twenty years ago despite total Gross Domestic Product more than doubling during that time: 

Total Number of Listed Companies in the U.S. by Quarter, 1980-2015

Source: Jay Ritter, University of Florida, Number of Listed Firms in the U.S. 1980-2015, by quarter.

Please reach out to Maryam if you’d like some great in-depth analysis, mhaque@nvca.org

Why does this matter to the venture capital industry?  A recent Stanford University study showed that despite less than one percent of new businesses started in the US being venture-backed, approximately 43 percent of companies that went public from 1979-2013 were venture-backed.  To put it simply, venture capital builds the product for the IPO pipeline. 

Venture-backed IPOs of total IPOs 1985-2015

Source: Thomson Reuters

Some may be skeptical that the IPO is even a necessary exit strategy anymore with the record-breaking amounts of late stage private capital currently available and a robust M&A market.  But the history of the industry has shown that a healthy IPO market has traditionally been good for the industry and the country.  Many also believe that we need the IPO as a viable exit option to keep the M&A market honest. 

Broadly speaking, we see three buckets of challenges that have appeared since around 2000 that have made becoming a public company less attractive:

  • Regulatory Costs/Complexity: the costs and complexity of being a public company have exploded in recent years. Sarbanes-Oxley, Dodd-Frank, the rise of the proxy advisory business and proliferation of securities litigation, among other examples, have all combined to make it harder to operate a public company. 
  • Research Coverage and Liquidity: The market making infrastructure for small-capitalization companies has all but collapsed. Even companies with solid IPOs can slide into obscurity as research coverage and depth of liquidity dry up.
  • Short-Termism: The markets are more focused on the short-term prospects of companies than ever, a particular concern for innovative companies with long-term time horizon projects that venture capitalists tend to invest in.

These are clearly difficult issues to grapple with, and the reality is there’s no silver bullet that will fix any of them.  But our goal with this set of proposals is to continue to make it more attractive to become a public company.  The report seeks to accomplish this by focusing on several areas, including expanding several of the most successful parts of the JOBS Act, encouraging research coverage by reviewing regulatory barriers and the global research settlement, streamlining certain regulatory and disclosure requirements and making common sense changes to the corporate governance system, and moving away from the current “one-size-fits-all” equity market structure.  

Some specific priorities for NVCA in this report include:

  • Expand Emerging Growth Company (EGC) status to ten years and remove certain phaseout rules;
    • Created by the JOBS Act, EGC status allows a scaled regulatory/disclosure regime for firms under $1B in revenue who are private or have been public for less than five years.
  • Require investors to disclose short positions;
  • Allow EGCs to consolidate their stocks’ trading on a small number of venues to improve liquidity;
  • Review regulatory barriers to research coverage for EGCs; and
  • Registered Investment Advisor (RIA) regulatory relief for secondary investments in EGCs.

We’re happy to have helped lay down this marker and will now work to advance these issues among policymakers in Washington, where we have a number of allies on the issue.  In particular, Jay Clayton, Chairman of the Securities and Exchange Commission (SEC), has made this one of his top priorities.  This will be a long process to attract attention and gain momentum, so we’re realistic about short-term chances, particularly in an election year.  But after November, there is an opportunity to get the original JOBS Act coalition together and work on a bipartisan bill that can use this report as a baseline.    

A special thanks to current and former NVCA Chairs Scott Kupor and Kate Mitchell, as well as former board member Stephen Holmes (also currently providing industry leadership as a member of the SEC’s Investor Advisory Committee) who provided a significant amount of thought leadership that informed NVCA’s positions during the long inter-organizational debate leading up to the report’s release.  It’s only through the hard work and dedication of our membership that we can undertake such a project, and we are all grateful for their time and effort. 

Please feel free to reach out anytime to discuss these efforts or capital markets reform more broadly.  It will only be by working together that we will be able to make progress on this critical issue.