A key part of the The Jumpstart Our Business Startups Act (JOBS Act), signed by President Obama in April of this year, has been described as creating an “IPO on-ramp” that makes the process of an initial public offering easier and more attractive.
In fact, many of the Act’s provisions grew from a task force appointed by the Treasury Department to address a decline in the number of IPOs in recent years.
No doubt many companies contemplating an IPO will race to the public markets as a result of the new law passed this year, and in the future we may see a bumper crop of IPOs in the short term. Special rules for small, fast growing companies will ease certain financial reporting requirements and allow them to work with the SEC confidentially before filing public registration statements.
But I believe the JOBS Act as a whole will probably continue the momentum away from companies going public.
While there are pieces of the new law that will encourage public listings, other aspects will reinforce the ability of companies that want to stay private to do so while giving others new options for raising capital outside of public markets.
“Private company trends are important because out of the 27 million businesses in America, only about 6,200 are publicly traded on the major exchanges,” according to Sageworks statistics. “The rest are privately held, and these businesses generate a majority of new jobs and more than half of Gross Domestic Product.”
Why Millions of Companies are Staying Private
This would continue a trend that began in the late 1990s. The number of publicly listed companies on U.S. exchanges has fallen from 8,823 in 1997, at the height of the dot-com boom, to under 5,000 at the end of 2011, according to the World Federation of Exchanges.
Financial distress led to many delistings during and since the Tech Bubble and recession. Many people blame Sarbanes-Oxley and other government regulations for becoming onerous, resulting in public companies going private or being delisted, or dissuading smaller private firms from public offerings.
Others, such as accounting firm Grant Thornton, have argued that changes to the market structure – such as online brokerages, further separation of equities research from investment banking – have eroded the financial underpinnings of the systems that provided support for small capitalization stocks.
Whatever the cause, it’s clear that millions of companies are staying private and many that were once public have been taken private. Meanwhile, the number of IPOs in the U.S. each year has declined. More companies held IPOs between 1996 and 1997 than in the entire decade between 2001 and 2011.
How the JOBS Act Helps Private Companies
Several aspects of the JOBS Act will help companies that want to stay private do so, even if they previously were on the cusp of being forced to go public.