The Market for IPOs and the JOBS Act

For much of the last decade, there has been an attempt to explain the decline in IPOs in the US by referring to over regulation and excessive litigation.  The over regulation argument is often a mechanism used to criticize the provisions in Sarbanes Oxley.  

Often lost in the debate were a host of structural explanations (aside from the condition of the economy).  The elimination of Glass Steagall essentially spelled the demise of independent investment banking firms (they have mostly been absorbed by or converted into commercial banks), eliminating a class of freestanding intermediaries that profited from public offerings and active capital markets.  Public offerings in the US are more expensive than those conducted overseas. 

Concern over the strength of the IPO market resulted in legal changes in the JOBS Act.  The Act included the "on ramp" provisions designed to reduce the costs of going public.  The Act was also intended to reduce the costs associated with public company status for a five-year period. 

Some of the provisions of the Act may encourage public offerings on the margin.  The process of confidential review will allow companies to discuss issues with the Commission before deciding to go public.  The need for only two rather than three years of audited financial statements may reduce some costs associated with the offering process. 

Other provisions will likely have little or no impact on the decision, at least if the primary issue turns on costs.  The elimination of an advisory vote on compensation or the exemption from requirements that do not exist (i.e.  mandatory rotation of auditors) are not likely to reduce costs.  Instead, they seem to be more an effort to parry aside requirements (or potential requirements) strongly disliked by management.  Perhaps there may be a marginal offering that goes forward because management, having avoided an advisory vote on compensation, is more psychologically disposed toward the public offering process. 

Nonetheless, the data for 2012 suggests that the public offering process has less to do with marginal costs than with the underlying state of the economy.  Stats on IPOs for 2012 at first blush look dire. As the WSJ reported, 2012 saw a global decline in the number of IPOs. 

The drop in 2012 was driven by slowdowns in China and Europe, which offset a rise in the U.S. In 2011, 1,277 companies went public globally, raising $159.8 billion. In 2012, only 751 companies made initial offerings, raising $113.1 billion, a 29% decline in the amount of funds raised.

Despite the downturn, the US faired reasonably well.  In fact, the amount raised in IPOs in the US increased.  As the article noted: 

more money was raised in U.S. IPOs versus China and Hong Kong in 2012 for the first time since 2008, according to data provider Dealogic. The U.S. raised $38.9 billion, a jump of 15%, while China's markets raised $21.8 billion, a decline of 59%. Europe saw just $13.8 billion raised by IPOs in 2012, a decline of 62% from a year earlier.

The statistics suggest that the pace of public offerings is mostly a factor of underlying economic fundamentals.  Europe and China have been experiencing slower economic growth and, simultaneously, have seen a decline in the amount raised in IPOs.  The US has been gradually emerging from the recession of 2008 and has seen an upswing in the amount of capital raised in the initial public offering process.