Earlier this week, Securities and Exchange Commission Chair Atkins gave remarks that provided a perspective on measures intended to promote capital formation. Speaking at the New York Stock Exchange, of course, he noted the now all too familiar statistics regarding the decline in the number of public companies in the United States—from over 7,000 in the mid-1990s to nearly 4,000 at present. The Chair’s comments focused on his recurring theme of “making IPOs great again.” Making the public markets an appealing choice (while acknowledging the appeal of, and the value of, a thriving private capital market) should be a high priority. However, much of the reporting in the financial press regarding his speech focused on the return of “smaller” IPOs—which requires much, much more than building an attractive on-ramp for IPOs.
In his comments, the Chair raised concerns regarding the burdens of regulation, “accretive rulemakings,” which have led to reams of paperwork and have resulted, perhaps, in disclosure that obscures rather than illuminates, to paraphrase. He called for a return to financial materiality as a guidepost, as well as for tailored or scaled disclosure requirements based on a company’s size and maturity. All of this is consistent with the approach taken in Title I, the IPO on-ramp provisions, of the JOBS Act, and is also consistent with bills currently pending in the House that would extend the “on-ramp” or phasing in of disclosure requirements over a longer time. The Chair discussed some of the other factors that he considers important to creating a more favorable climate for public companies. These include addressing shareholder proposals and the proxy process, as well as litigation reform.
The Chair noted that “[r]aising capital through an IPO should not be a privilege reserved for those few ‘unicorns.'” While all of these measures are undoubtedly important and necessary steps to improve capital formation, there are significant issues that disproportionately affect smaller companies that would not be addressed by any on-ramp regardless of its slope or length. Since the 1990s, the market has changed. There are fewer institutional investors focusing on small- and mid-cap stocks. We cannot make them reappear. There is less research coverage dedicated to smaller companies—this is well documented by the reports that have been published over the years by the Office of the Advocate for Small Business Capital Formation. The lack of research coverage negatively impacts the liquidity of the securities of smaller public companies. This, in turn, makes it more difficult for these companies to raise capital in follow-on offerings and raises their cost of capital even though these companies chose to become public, in part, to improve their access to capital and to lower their cost of capital. The companies are then forced to turn to less appealing, higher cost capital-raising alternatives that also are more dilutive. That negatively impacts their stock price. A downward spiral. The shareholder vote requirements of the securities exchanges that require a shareholder vote for certain private placements and for financings in close proximity to acquisitions disproportionately negatively impact smaller public companies. These have never been considered in terms of their chilling effect on smaller public company IPOs. The one-third limitation associated with the “baby shelf” rules are punitive for smaller public companies. The Staff interpretations on shelf capacity in connection with at the market offerings for baby shelf filers also negatively impact smaller issuers and are inconsistent with other interpretations. And, of course, the research rules and the infrastructure relating to equity research would need to be addressed if one wanted an IPO market for companies other than unicorns.