When I wrote my blog here last Friday on the day of Facebook’s initial public offering (IPO), I praised the firm’s innovations but injected a note of skepticism as to the gains of ordinary investors. I was slightly worried that the piece would be seen as raining on the IPO parade.
Now that this “parade” has turned into a stampede in the other direction, I still worry that my overall point will be missed, and politicians will rush to regulate in response to problems caused by overregulation in the first place.
As I wrote last week, due to the massive increase in the cost of going public from the Sarbanes-Oxley Act of 2002, Dodd-Frank and other regulations that have attempted to protect ordinary shareholders from all forms of risk, middle-class investors are being robbed of smaller IPOs that would allow them to grow wealthy with companies at their growth stages.
The Associated Press reports that regulators are “probing” issues with the IPO rollout. But all they might find is that the price of Facebook, like all stocks, falls after an initial frenzy. Rather, what policy makers really need to “probe” is the overregulation that has resulted in IPOs fewer in number and larger than ever, resulting in ordinary investors left with far fewer opportunities to get in on companies like Facebook at their emerging growth stages.
The size of Facebook’s IPO — over $100 billion in market capitalization — has attracted much attention. But a decade ago even a $1 billion IPO — which LinkedIn, Groupon, and others have all exceeded in the past couple years — was unheard of. Before the last decade, as noted by President Obama’s Council on Jobs and Competitiveness, 80 percent of IPOs had market caps of less than $50 million. In fact, Home Depot only had four stores when it went public in 1981. Imagine if you had bought stock in Home Depot back then! You would need a Mansion Depot today!
As I wrote last week, this relatively new phenomenon of “Cheers IPOs” — in which companies don’t go public until, to paraphrase the ’80s TV theme song, “everybody knows their name” — reduces the benefits of going public both in terms of job growth and of the ability of ordinary investors to grow wealthy with small and mid-size firms. “What a healthy economy needs is IPOs of companies you have never heard of, which go public not to realize market value for the shares of their founders, but to raise money to expand operations and add jobs,” I contended and still do.
The good news is that in the month since the limited regulatory relief of the bipartisan Jumpstart Our Business Startups (JOBS) Act went into effect, there has been a noticeable uptick of smaller and growing firms returning to the IPO market. Among other things, the JOBS Act creates a five-year “on-ramp” for most firms going public in which they are exempt from the Sarbanes-Oxley internal control mandates, the Dodd-Frank proxy provisions, and other burdensome regulations.
As I had concluded, we can hope that “the mini-IPOs enabled by the JOBS Act [and future regulatory relief] are the wave of our entrepreneurial future.”