Speaking at a conference at Columbia University as part of the Columbia Law and Business Schools’ Program in the Law and Economics of Capital Markets, Securities and Exchange Commission Commissioner Uyeda shared his views regarding the private markets and some of the challenges facing smaller public companies.
The Commissioner noted the decline in the number of U.S. public companies, with the number of public companies having declined by nearly 50% by 2019 from the 8,000 or so in 1996. In part, the Commissioner observed, the decline is attributable to the decline in the number of IPOs (between 1990 and 2000 there 4,194 IPOs by U.S. operating companies and between 2001 and 2021 there were only 2,276 IPOs). Some companies have chosen M&A exits instead of IPOs. The costs and burdens associated with regulatory compliance requirements may have deterred other companies from choosing to pursue IPOs. Consistent with data included in the 2022 Report from the SEC’s Office of the Advocate for Small Business regarding smaller public companies, which we previously blogged about, the Commissioner noted that the decline in public companies and IPOs has been even more significant for smaller companies. From 1998 to 2017, the percentage of listed companies with less than $100 million in revenue decreased by approximately 60%. Between 1990 and 2000, the percentage of IPOs involving a company that had less than $100 million in revenue in the trailing twelve months was 72%. Since 2001, that percentage has declined to 55%. The Commissioner notes that smaller companies can raise capital in the private markets, and IPOs now are largely used by more mature companies seeking a listing in order to provide liquidity for their existing securityholders.
Given that many companies choose to remain private and defer IPOs and rely on private placements in order to raise capital, Main Street investors “lose out on the ability to participate in the potential upside associated with some growth-stage companies and the diversification that investments in such companies can provide.” He notes that “[w]e need to re-think how Main Street investors can have exposure to growth-stage companies that go beyond efforts to force those companies to undertake some form of public offering. So long as the burdens of being a public company remain significant, limiting companies’ ability to raise capital in the private markets, or otherwise increasing the costs to be a private company, will not result in them going public. Rather, such restrictions could prevent new companies with innovative ideas from being started in the first place.” This is an important perspective particularly in light of the increasingly strident views being expressed regarding the private markets, including at the most recent SEC Investor Advisory Committee meeting (see presentations and materials).
The Commissioner concludes that “the answer to fewer companies going public is not to overregulate the private markets through prescriptive disclosure and governance requirements. The Commission should create a regulatory environment that appropriately balances the costs and benefits associated with any required disclosures, while considering its investor protection mission.” See the full text of the remarks, which include suggestions for revisiting the accredited investor definitions, here.