The market for initial public offerings is shaky. So says the new head of the U.S. Securities and Exchange Commission, Jay Clayton, and the president of the New York Stock Exchange, Tom Farley, who point to burdensome regulations as a big part of the problem. The decline in new listings has been fingered as a key reason the total number of public companies in the U.S. shrank from more than 8,000 in 1996 to about 4,400 in 2016. Does fewer companies going public mean there’s something fundamentally broken in the IPO process? Not necessarily.
1. Why are fewer companies going public?
Many companies can find capital privately, allowing them to avoid the red tape that comes with a stock listing. A prime example is the technology industry, which has more than 200 closely held companies with valuations higher than $1 billion, according to CB Insights. Take Airbnb Inc.: The nine-year-old home-booking company has raised about $3.4 billion in private funding rounds and is valued at $31 billion (what investors are willing to pay for a share in the latest private stock sale, times the number of existing shares). Airbnb has expanded into new markets and dealt with regulatory issues away from the daily scrutiny of public market investors, unlike, say, Google (now Alphabet), Apple and Amazon.com, which held IPOs within six years of their founding.
2. Where does the private funding come from?
Nowadays, all over. Old-school private funding players like venture capital firms have been joined by mutual funds, hedge funds, sovereign wealth funds and private equity firms. These parties have piled money into private companies, trying to get a piece of the next big business before an IPO. Throw in new players, like SoftBank Group Corp.’s almost $100 billion Vision Fund, which has stakes in private technology and biotech firms, and many younger businesses have been able to find cash when they need it.
3. How has this changed the IPO market?
The number of annual U.S. IPOs has declined, but the deal sizes are bigger. Because companies are waiting longer to go public, they’re typically larger and more mature when they finally do. From 2007 to 2016, there was an average of 164 corporate IPOs each year, down 47 percent from the prior decade. But the average amount of stock sold climbed 82 percent to $284 million. Still, some of the most notable IPO holdouts, like Airbnb or the $69 billion Uber Technologies Inc., are among the country’s most valuable companies, based on their valuations gleaned from private funding rounds.
4. Is it really such a hassle to be a public company?
It does bring new responsibilities. Your company is judged on a daily basis through its stock price, and management must file quarterly financial reports and additional incremental disclosures. These checks were designed to provide information to public investors on things that can affect the company’s performance. Some new companies faced a tough time once out in the market. Snap Inc. and Blue Apron Holdings Inc., two tech darlings, went public in 2017, only to have their stocks fall below their last private market value. That’s put a chill on both public and private share sales.
5. Can anything be done to boost IPOs?
At the NYSE, which makes money when companies list, Farley says that the cumbersome listing process and financial regulations dissuade companies from going public. He’s bemoaned rules including the 2002 Sarbanes-Oxley Act, which regulates how companies divulge their finances. Meanwhile, the SEC recently extended to all companies, regardless of size, a rule that allows them to file confidential IPO documents. The intent is to make the listings process more efficient by allowing companies to start the filings process without publicly divulging potentially sensitive information.
6. If there’s no IPO, how can employees cash out?
This has become a hot question over the past few years. As companies stay private longer, employees with private stock haven’t been able to collect the cash reward they feel they’ve earned for their hard work. Private companies have begun to use secondary offerings, where investors can buy shares from employees and other existing holders in private transactions, usually at the same time as a new funding round.
7. Are individual investors losing out?
Potentially. It’s difficult for many individual investors to get in on private share sales. That means the longer these companies delay going public, the more these investors miss out on early-stage growth. Getting in a younger company is inherently riskier, but the few winners usually reward investors with big returns.
8. Did fewer IPOs really cause the drop in total companies?
Not necessarily. EY says the smaller number of public companies now can be attributed to the influx of dot-com listings beginning in the mid-1990s, since many of those companies eventually failed and delisted. Three-quarters of the decline in total companies took place between 1996 -- the height of the tech bubble -- and 2003. Almost 2,800 public companies disappeared in that period because of mergers and acquisitions or delistings, a May report from EY said. The accounting firm added that if policy makers are aiming to generate capital formation, job creation and economic growth, it may not matter much whether the money is raised publicly or privately.
The Reference Shelf
- Uber’s new CEO hinted at a 2019 IPO.
- EY’s analysis of the declining number of public companies.
- A Bloomberg Prophets column in June addressed how to bring back America’s disappearing IPOs.
- A Nasdaq report on how to reignite America’s economic engine.
- In a July speech, Clayton asked whether "the Main Street investor" had "appropriate investment opportunities."
- In testimony before the U.S. House of Representatives, Farley warned that regulations were choking off IPOs.