America's Ipo Edge

It's like watching the birth of a new galaxy. From Netscape Communications to Boston Beer, hundreds of new companies are going public, the explosive stage of a process that begins with basement startups and continues until a business is large and viable enough to tap the public capital markets. In 1995, initial public offerings are expected to raise a stunning $29 billion, laying the foundation for the next cycle of U.S. prosperity. What's more, the new businesses energize the entire economy, as established companies speed up their own innovation to avoid being blown away.

This new generation of small, innovative companies--the envy of the industrialized world--reflects in large part the health of the U.S. financial markets. Like no other markets in the world, they are able to direct money into innovative and risky ventures that can pay off big. Neither Japan nor Europe has a good way of funding startups, a key deficit in this era of rapid technological and economic change.

What can the U.S. do to maintain and improve its advantage? At the top of the list is keeping the financial system as open and transparent as possible. One good step is new legislation that would encourage companies to release as much information as possible while penalizing fraud. The Securities & Exchange Commission should follow policies that offer a level playing field to all and discourage insider trading. That's the way to make investors more comfortable about putting their money into high-risk, high-return ventures.

At the same time, regulators need to move quickly to maintain the soundness of the financial system when problems do arise. In the late 1980s and early 1990s, the U.S. finally took steps to deal with the long-festering S&L crisis. Now American banks are on their soundest financial footing in decades. In Japan, by contrast, the persistent overhang of bad real estate loans is weighing down the entire financial system and exerting a paralyzing effect on the stock market.

The IPO boom also shows the power of tax policies that encourage savings and discourage wasteful investment. Mutual funds, fueled by the retirement funds of baby boomers, have become key buyers of new public offerings, as tax-exempt 401(k) accounts and other savings incentives pump billions through the financial system. Conversely, the 1986 tax reform act made it much less tempting for wealthy individuals to invest in nonproductive tax shelters such as real estate, while increasing the attractiveness of investing in growing businesses. That's why Congress, as it tinkers with the tax code, should resist the urge either to create new loopholes or limit tax-exempt retirement accounts in order to save money.

Finally, the ability of innovative companies large and small to raise money is a tangible benefit of the U.S. government's following sound economic policies. IPOs are thriving, in large part, because the entire stock market is booming. The stock market, in turn, has been lifted by economic policies that are holding down inflation and interest rates to their lowest levels in a generation. A smaller budget deficit--when Congress and the White House agree--will free up even more capital that can be used to fund growing businesses.

The IPO market will always be a volatile one: Investors should understand that many new companies will fail. But that's a clear sign of the creative ferment needed for growth.

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