November 6th, 2009
Scary study on how lack of IPOs is harming US economy
The lack of IPOs is certainly harming the Silicon Valley economy. With few IPOs, capital isn’t being returned into the VC funds, and the cycle of innovation is sputtering.
A new study describes the larger picture.
Grant Thornton, a large accounting firm, has published a study that shows the connection between IPOs and the health of the US economy.
And it shows how new listings in Asia are helping to shift wealth and competitiveness outside of the US.
Here are some of the findings:
The scale of the decline in IPOs:
- Just 12 companies went public in the US in the first half of 2009 - 4 were non-US.
- 1997 was a peak year for IPOs, since then it has declined 39% (55% decline if adjusted for GDP growth.)
Asian IPOs:
- Asian growth in new listings is far higher than its GDP growth.
- Hong Kong new listings have doubled since 1997, tripled since 1991.
The US is losing the number of listed companies:
- Just to maintain US listings at the current level would require 360 new listings a year - a level not reached since 2000. There were only 54 in 2008 and an average of 166 a year since 2001.
- The US would require 520 new listings a year to keep pace with GDP growth of 3%.
The study claims the US has lost 22 million jobs because of the lack of new listings.
Pascal Levensohn, Board Member of the National Venture Capital Association (NVCA):
“The inability for emerging growth companies to access U.S. public equity capital by completing IPOs below $50 million inhibits job creation and hurts American entrepreneurs more than any other group. Starved for long-term risk capital in the U.S., the next generation of innovative private enterprises will continue to move to non-U.S. emerging innovation hotspots, where startups are nurtured through attractive capital incentives, if we can’t repair the bridge into public markets.”
The study offers a long list of possible solutions that include creating new types of markets and changing a long laundry list of regulations governing the stock market and investors.
Such as:
- Create an alternative public market segment
- Make enhancements to the private market
- Free companies to market their securities more broadly
- Overhaul verification of QIBs and accredited investors
- Exempt companies from SEC registration
- Self-regulate trading spreads
- Exempt market participants from holding period
- Encourage centralized information, control and custody systems.
-Research permitted to work with banking
There is no doubt that the lack of IPOs is harming the economy. However, this study appears to be an excuse to drive large changes in regulations governing the stock market and investments.
This will be difficult to do given the current lack of trust in Wall Street and its enthusiasm to exploit any arbitrage opportunity no matter the cost to society.
There would be plenty of new loopholes for Wall Street to discover with such a large number of new rules.
Also, there is nothing said about changing Sarbanes-Oxley. This is a huge burden on young companies and it is one of the largest obstacles to an IPO.
It would be far better to leave the stock market and investor regulations in place and to focus on reforming Sarbanes-Oxley.
This would be a much faster strategy in opening the door to new IPOs than persuading Congress to pass the many changes in stock market regulations that the study’s sponsors have requested. There’s little chance of that happening.
You can see the whole study here.
Tom Foremski reports on the business and culture of Silicon Valley at the intersection of technology and media. He also writes at Silicon Valley Watcher. See his full profile and disclosure of his industry affiliations.
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