The Decline of the IPO

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The Decline of the IPO

From a company’s standpoint, staying private and obtaining capital through the private markets may be simpler and more desirable than going public.

But from the standpoint of Securities and Exchange Commissioner Kara Stein, a market in which a huge fraction of companies remain private may not serve the interests of investors and society at large. For example, private companies have to disclose only limited information about their businesses, while publicly traded companies must regularly disclose a far larger amount, providing investor protections and benefiting the market as a whole, says Stein, a recent visiting speaker in the Corporations and Society Program at Stanford Graduate School of Business.

“There’s a lot of transparency in the public space,” says Stein, who stressed in an interview that she was expressing her own views and not those of the other commissioners or staff of the SEC. By global standards, “our public markets here are the deepest, they’re the most liquid, and they’re enabling companies to access very large amounts of capital and grow and create jobs,” she says.

Staying private, though, is a route that companies are following with rising frequency, Stein notes.

The number of publicly traded companies in the U.S. was about 4,300 as of 2015, down from a 1996 peak of about 8,000, according to a 2017 study from accounting firm EY. And in 2016, 112 initial public offerings occurred, down from 291 in 2014, the year IPOs reached their highest level since 2000.

Fewer Lawyers, Accountants, and Expenses

Companies can tap a deep well of private capital from such sources as hedge funds and private equity funds. Staying private also lets a business avoid hiring lawyers and accountants to make the required, ongoing disclosures and regulatory filings to the SEC. Currently, just over half of capital raised is coming from the private market.

But, Stein asks, what might happen to the overall market when too many companies stay private? For starters, more investors could be hurt, since investor protections in the private market are less robust than in the public market. And as the proportion of private companies grows, there’s less information flowing into the financial ecosystem, reducing the market’s overall transparency, Stein says.

All companies and their investors depend on a steady flow of information to help them make decisions on, for instance, valuations and pricing. If too many companies are private, it could also create “a deterioration in price discovery” among private companies, Stein says.

“At what point is there a tipping point that actually hurts both the private space and the public space?” she asks.

Gauging the Impact of Crowdfunding

To ensure that enough companies choose to become and remain public for the good of the overall marketplace, “we need to be making sure we’re not dissuading folks from actually accessing the public space or over-incentivizing people to stay private,” Stein says. For example, the SEC is studying the effects of Regulation A+ and Regulation Crowdfunding rules to understand how these provisions, which allow companies to raise money from unaccredited small investors via crowdfunding, are being used.

The public market offers the liquidity that small investors need. And small investors depend on access to a wide range of companies on the public market when making long-term investments into their retirement or children’s education funds, she says.

Stein also argues that the benefits of being a public company, such as strong financial and operational controls, can outweigh the costs. “It’s often very good for the company in its process of maturing,” she says. “It brings a greater discipline, but it also helps a company think through how to organize itself as it grows.”

Of course, some firms aren’t big enough to operate as public companies or may choose to remain private for other reasons, such as a founder’s wanting to maintain control. Private companies shouldn’t necessarily have the same disclosure requirements as public ones, but “it may make sense to have different levels of disclosure” for different types of private firms, says Stein.

Ultimately, though, the challenge is figuring out how to make it easier for companies to join the public space where “they should be able to grow and prosper in the sunlight that comes with being a public company,” Stein says.