Over the last two decades, there have been a number of alternatives proposed to replace the traditional IPO process. Whether it’s been Dutch auctions, SPACs or direct listings, each has failed to attract a broad spectrum of public investors. The traditional IPO process has always emerged as the best way to balance the sometimes competing interests of issuers, existing shareholders and public investors.
There is no doubt, however, that the traditional IPO process could be improved and streamlined. Unfortunately, the last time Congress attempted to overhaul the IPO market, the resulting legislation, the JOBS Act of 2012, created more problems than it solved, including less disclosure and unwieldy large tech unicorns that have passed their sell-by dates. The JOBS Act was harmful because it addressed the agenda of Silicon Valley and ignored the interests of public investors.
Instead of trashing the traditional IPO process, now is an opportune moment for the SEC to assess the effects of the JOBS Act and resolve the sometimes contradictory regulations issued over the last twenty years.
Our modest proposals
Our proposals are all designed to reset the balance between public investors and large institutional forces by reinstating the investor protections that the JOBS Act eliminated, removing ill-considered regulations, and equalizing tax treatment. Here are the recommendations
Disclosure
- Reinstate the requirement that all IPOs filing an S-1 registration statement provide three years of audited financial statements and up to five years of supplemental financial information, as was the case prior to the JOBS Act. Under the current rules, investors can only compare two years of results and are usually deprived of the valuable supplemental information that was regularly provided prior to 2012.
- Eliminate the $1.07 billion demarcation for “emerging growth” companies as a minimum to comply with accounting standards and the description of executive compensation required of other issuers. It is ludicrous to assert that companies with $300 million and more of revenue are “emerging”. If a company wants the privilege of listing on a US stock exchange, it should have in place the resources to comply with GAAP standards.
- The SEC should establish guidelines for non-financial disclosure for companies such as biotechs, where financial performance results are far less important than the results of clinical trials.
Rules
- Restore the shareholder threshold for registering securities with the SEC to 500 shareholders. The JOBS Act raised the threshold for securities “held of record” to 2,000 persons from 500. This created the current glut of over 200 aging technology unicorns that operate as significant companies affecting millions of Americans and hundreds of thousands of employees. There have already been several instances of companies that have blown up due to lack of adult supervision of governance and financial operations.
- Rescind the JOBS Act exemption to exclude shares held under employees’ compensation plans for the “held of record” definition. As a result, more employee shareholders in large private companies lack access to periodic financial disclosures as they would pre-JOBS Act, because the companies would have been required to register them with the SEC and go public.
- Retain the clear distinctions between IPOs, whose objective is primarily to raise money, and direct listings, whose objective is to provide a quick exit for insiders. Conflating the two transactional processes, as was proposed in late November 2019 by the NYSE and quickly rejected by the SEC, would create a hybrid transaction that fails to protect investors and the public interest.
- The “test the waters” communications with qualified institutional investors should be amended to treat all potential shareholders equally, as was envisioned under Regulation FD.
Tax
- Close the “carried interest” loophole to level the playing field for public and private investors. The longstanding Wall Street tax break for large institutional financiers to pay lower capital gains rates on a portion of their income has contributed to the extended and unhealthy longevity of tech unicorns.
No Fake IPOs!
We hope “Hijacking the IPO Market” series has stimulated your thinking about promoting and protecting new public company creation in the US. If you would like to react to our series, please contact us at:
https://www.renaissancecapital.com/Contact
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Hijack Series
Part 1: How the IPO Market Is Being Hijacked
Part 2: How Government Regulations Nearly Killed the IPO Market
Part 3: How the JOBS Act Abuses Most Public Investors
Part 4: How the IPO Market went from Dot.com to Unicorn Bubble
Part 5: Why Direct Listings Are Fake IPOs
Part 6: The Direct Listing Bailout for Unicorn Investors
Part 7: How to Promote and Protect Healthy Capital Creation
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