Lyft and the ‘Cheers’ IPOs: How Overregulation Leaves Middle-Class Investors Behind
After much anticipation, Lyft finally went public today, opening on NASDAQ at $87.24 per share—well above its initial public offering price of $72.
Lyft’s market debut is an example of what I have called the “Cheers IPOs.” That is, companies that don’t go public until they are so big and ubiquitous that—to paraphrase the famously catchy theme song of the classic NBC sitcom—everybody knows their names.
This phrase is not a knock against Lyft. The pioneering firm, along with its still-private competitor Uber, has already earned its place in the annals of American innovators for smashing local taxi monopolies (which were the source of many government-granted riches for those at the top, but not necessarily for taxi drivers), providing flexible work, and giving consumers low-priced and accessible car service. Lyft’s run may be 15 years or more than 150 years, as it was for the once-great innovator called Sears, but it has earned at least a page in the history books of American commerce.
Rather, this trend of Cheers IPOs is a knock against government regulation of the past 15 years that has made it ever more difficult for companies to raise capital by going public at their early stages of growth. This in turn makes it difficult for middle-class investors to build wealth by getting in on the early stages of growth of those companies. No one knows how much higher Lyft may soar, or how low it may fall, but one thing is clear. Ordinary, non-wealthy investors have been locked out of its phenomenal growth until today.
The Cheers IPOs phenomenon is less than 20 years old. When Starbucks went public in 1992, most people outside of the chain’s home base of Seattle hadn’t heard its name. Even fewer people had heard of Home Depot when it went public on NASDAQ in 1981 as a very small chain with only four stores, all operating in Georgia.
And whereas the size of Lyft’s IPO is $2.2 billion (with a total valuation of the company at $24 billion). Starbucks’ IPO was less than $50 million. But so was that of Cisco Systems in 1990. And that of Amazon in 1997. In fact, as I said in my testimony in 2017 at a hearing held by the House Financial Services Committee: “In the early 1990s, 80 percent of companies launching IPOs—including Starbucks and Cisco Systems—raised less than $50 million each from their offerings. Entrepreneurs were able to get capital from the public to grow their firms, while average American shareholders could grow wealthy with the small and midsize companies in which they invested.”
But all this changed dramatically after the enactment of the Sarbanes-Oxley Act of 2002, a law that quadrupled auditing costs for many public companies after being rammed through Congress in the wake of the failures of Enron and Worldcom. As a result, a few years after “Sarbox” was enacted, 80 percent of firms went public with IPOs greater than $50 million, while IPOs greater than $1 billion have become a normal occurrence. This means that ordinary investors—as opposed to venture capitalists, angels, and other wealthy “accredited investors” the government allows to purchase shares in private companies—are locked out of the early-stage growth of the small companies that could become tomorrow’s giants.
Having not learned its lesson, Congress then piled on with the Dodd-Frank so-called “Wall Street Reform” Act in 2010, which pummeled public companies with mandates such as tracking use of “conflict minerals” and the “pay ratio” of highest to lowest paid employees that added substantial costs to achieve social agendas and did virtually nothing to prevent investor fraud.
Lyft’s IPO filing with the Securities and Exchange Commission (SEC) showed that these mandates can put a substantial burden even on a company as big as Lyft. Citing Sarbanes-Oxley and Dodd-Frank, Lyft warns potential shareholders in a list of “risk factors” in its filing: “Operating as a public company requires us to incur substantial costs and requires substantial management attention … As a public company, we will incur substantial legal, accounting and other expenses that we did not incur as a private company.”
If a firm as big as Lyft considers these mandates burdensome enough to be a “risk factor” to its success, imagine what smaller companies have to deal with. That’s why Congress—short of repealing much of Sarbanes-Oxley and Dodd-Frank—should immediately take up bipartisan JOBS Act 3.0 legislation that passed last Congress overwhelmingly (even with the support of Rep. Maxine Waters (D-CA), which she recently reiterated).
This includes the Fostering Innovation Act, which was made part of the Jobs and Investor Confidence Act, which extended for some midsize public companies the original JOBS Act’s exemption from the Sarbanes-Oxley “internal control” mandates. Then-Rep. (and now Senator) Kyrsten Sinema (D-AZ), a co-sponsor of the legislation, said in 2017 that it “allows innovative companies to spend valuable resources on product research and development instead of costly and unnecessary external audits. This commonsense solution cuts red tape and allows companies to move life-saving innovations forward.”
And needless to say, Congress should scuttle any legislation that would make it more difficult to become or to remain a public company, such as the current foolish efforts to curb share buybacks. As longtime financial journalist John Carney writes, such restrictions “would mean that the costs of running a [public] company would increase or capital would remain trapped inside the company.” This would lead to incentives for “selling the company to a private equity firm that will be willing to pay more for the company than public markets because it can operate it at a lower cost.”
So let’s “lyft” up smaller entrepreneurs and middle-class investors by reducing regulation, rather than bring them down further with more red tape.