What happened to IPOs redux

Larry Ribstein —  22 March 2011

A couple of months ago I asked, “what happened to IPOs.”  Today’s WSJ asks almost the exact same question and gets the same answer:

The elephant in the room is the 2002 Sarbanes-Oxley law, which triggered billions of dollars in new compliance costs for public companies.

* * * The question for companies now, as ever, is whether the benefits of going public are worth the costs. It’s indisputable that America has raised those costs in recent years. In addition to Sarbox’s Section 404, Congress has made it easier for big labor to get proxy access, increased the opportunities for lawsuits, too often turned reporting mistakes into major fines or potential felonies, and meddled into corporate pay decisions. None of these make going public more attractive.

With America still suffering close to 9% unemployment, it’s time for both parties to bring the cost/benefit calculus for IPOs back into balance.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

2 responses to What happened to IPOs redux

  1. 
    north fork investor 22 March 2011 at 3:32 pm

    Most of what was in the WSJ editorial was drivle. The quality of most of those IPOS was abominable. A large percentage were penny stock IPOS out of the denver penny stock mills. And who said there is any correlation between the number of IPOS and unemployment.

    Quality companies are going public; but small low quality IPOS aren’t. That is not necessarily a bad outcome for public policy. Few of the tiny IPOs ever amount to anything.

    Come up with some specific ideas for improving SOX because there are a lot of good ideas in it.

  2. 

    ….Or the equity markets have been highly uncertain for the last half decade (or full decade) and both issuers and underwriters have had a difficult time bringing companies to market at attractive prices? Now, you can try to say that investors are shaving a couple of dollars off of every issuer’s IPO price because of SoX costs, but I’d like to see the evidence.

    Doing an IPO takes months, aside from Sarbanes Oxley. In the 1990s you had an unprecedented number of IPOs, many of them by companies that should not have been public, as evidenced by the fact that the benefit of being public (increased liquidity and raised capital) was squnadered and individual investors who probably should never have invested in those companies (as opposed to less liquid private companies where you have to be more sophisticated to invest) lost money.

    Indeed, private equity companies have been generally desperate to do IPOs of their portfolio companies — they, the so-called masters of the private company, still see it as the best exit strategy while they strip cash from the company in the interim — but the equity markets have been far too choppy and unpredictable to effectively and systematically take companies public. If you want to make this claim you should study where, in relation to their range, companies actually price their IPOs. I think you’ll find very few that price above their range and many more that price below, if at all.