This past week, the SEC’s Small Business Capital Formation Advisory Committee met to discuss several key topics regarding access to capital and smaller firms. One of the topics revolved around initial public offerings (IPOs), a sector of finance that tanked in 2022. In fact, according to a presentation by Matt Toole of Refinitiv Deals Intelligence, 2022 has been the slowest first nine-month period for US-listed traditional IPOs since 1990, with just $6.6 billion in proceeds raised so far this year. This represents a whopping 94% decline compared to a year ago. At the same time, the number of public offerings has been the slowest period for US IPOs since 2009.
The traditional IPO market has been in decline for many years. This is largely due to the cost of pursuing a public offering and not just the initial fees. The cost of ongoing compliance continues to rachet up, year after year, largely due to a rule upon regulation approach taken by policymakers that may eventually smother public offerings.
At the same time, an ocean of private capital has learned to jump to the head of the queue to invest early before a company goes public. This means that by the time a company goes public much or most of the potential near-term gain has been hoovered up by big money. This also impacts retail investors as it becomes harder to participate in the growth of promising young firms.
Insult to injury, the cost of becoming a public company is poised to go even higher as the SEC moves to enact social policy disclosures (ESG) like climate-related impact. While the impact on public firms is unknown as the holistic cost is inestimable, it will obviously have a negative impact on IPOs.
In recent years before the current slump, IPOs rebound, but this has largely been due to SPACs or Special Purpose Acquisition Company deals. SPACs may never regain their luster due to new rules that have cooled the market along with the initial blitz that may have overshot the market.
The SEC’s mission includes facilitating capital formation – for both large and small firms. It should be clear that the Commission should be looking to reduce the barriers and affiliated costs with becoming a public company. At the same time, the SEC should be pursuing improvements to the exempt offering ecosystem, including Reg A+, Reg CF, and Reg D. Currently, it seems the SEC is determined to head in the opposite direction. Some insiders have labeled the current Commission as “anti-capital formation.”
At the same time, the Commission should be creating an environment that expands access to opportunities for smaller investors. This should include expanding the definition of an Accredited Investor to allow more individuals to gain access to private offerings as public markets decline and private markets grow in importance.
The SBCFAC will be authoring recommendations for the Commission to pursue regarding public offerings. Hopefully, the wording will advocate on behalf of improving the IPO market (as well as helping smaller investors).
The IPO presentation may be downloaded here.
