Securities and Exchange Commission Chairman Jay Clayton wants to "enhance the ability of every American to participate in investment opportunities." He didn't say whether they would be good ones.
Clayton appeared at the Economic Club of New York on Wednesday and gave his first public speech since being appointed by President Donald Trump. He said his priority was looking out for average mom-and-pop investors, whom he dubbed Mr. and Mrs. 401(k), and he hit on an issue that has quickly become one of his favorites, the shrinking equity market.
Whether that's an actual problem we will put aside for now. We have our doubts here at Gadfly. Clayton, however, does not. At his confirmation hearing in March, he said the reason there are fewer public companies and initial public offerings is that public markets are less attractive than they used to be, a point he echoed on Wednesday. He said inhospitable equity markets are bad for both individuals looking for investment options and companies looking for capital.
Clayton's solution appears to be to lean on the JOBS Act, a 2012 law that makes it easier for smaller companies to go public in part by allowing them to disclose less information to potential investors than has long been required. The move is in keeping with the general philosophy of the Trump administration that less regulation alone will solve a big portion of the U.S.'s persistent economic sluggishness.
And Clayton wants to expand the law. He's already extended to all companies a rule that previously allowed only small companies to keep sensitive information private for longer before an IPO. And it's not just about IPOs. On Wednesday, Clayton said he was willing to bend the rules for any company doing any kind of offering. If companies have information that's "burdensome to generate," he said, no problem. Not only is the SEC ready to consider any modification, even in financial reporting requirements, that would make it easier for companies to raise money from investors, Clayton encouraged companies to request the exemptions.
Here's the problem: In the five years since the JOBS Act was adopted, it doesn't appear to have done anything to boost the number of companies going public. If anything, it appears to have had the opposite effect. In 2011, the year before the JOBS Act was passed, there were 356 U.S. IPOs. The number dropped to 230 the next year. And it has mostly slipped since then. The amount of money raised in IPOs is up this year, but at 69 deals through the middle of July, the number is on pace to match 2016, which was the worst year for new issues since the financial crisis. Blue Apron Holding Inc.'s big IPO flop, and the fact that Snap Inc. is now trading below its offering price, won't help things, either.
Clayton suggested that the IPO market would be even worse without the JOBS Act, saying on Wednesday that 87 percent of the companies that have gone public since the law was passed had less than $1 billion in annual revenue, implying that it has encouraged more smaller and growing companies to go public. But it's not clear it has. Companies that go public have long tended to have less than $1 billion in revenue. In the five years before the JOBS Act was passed, 85 percent of the companies that went public had less than $1 billion in revenue, not much different from today.
And there is some evidence that the JOBS Act is making the IPO market worse, at least for Mr. and Mrs. 401(k). On Wednesday, the SEC announced charges against Power Traders Press and Elite Stock Research, a "massive" pump-and-dump scheme in which 13 individuals bilked more than 100 mostly retirees out of more than $10 million, according to the agency. One of the stocks that was part of the fraud was Grilled Cheese Truck Inc., which thanks to the JOBS Act went public in 2014 as an emerging-growth company. It's not clear that the IPO of the Grilled Cheese Truck company ended up creating any jobs, and certainly no lasting ones. The former owner and franchiser of mobile dispensaries for melted cheese hasn't issued a financial statement since late 2015 and no longer operates food trucks. It's now in the cannabis business. Shares of the company have plummeted 93 percent to 44 cents from a high of $6 in early 2015. According to the SEC, when clients of Power Traders called to complain about the horrendous performance of their investment accounts, stuffed with Grilled Cheese Truck and other funky stocks, they were told to look around their house for rope and hang themselves with it.
In his speech, Clayton hinted at the Power Traders case. He called "microcap fraud" sinister behavior, and he said the SEC under his guidance would continue to pursue fraudsters, even in markets some call insignificant. And that's a good thing. Someone is going to have to hoover up all the fraud Clayton's misguided deregulation push to pump up the IPO market will create. It might as well be him.
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