securities exchange, the issuer will be generally subject to the reporting requirements of the Exchange Act. Issuers that have undertaken an IPO or that are SEC-reporting companies also will become subject to many other rules and regulations. Over time, the regulatory burdens for public companies
have increased. In 2002, following a series of widely reported corporate scandals involving fraudulent accounting practices and governance abuses, the United States adopted legislation affecting all public companies, the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley imposed a broad series of requirements relating to corporate governance, enhanced public disclosure, and the imposition of civil and criminal penalties for wrongdoing. Sarbanes-Oxley and its associated rules: • require that CEOs and CFOs certify the accuracy and completeness of their company’s periodic reports and impose criminal penalties for false certification;
• require the establishment and regular evaluation of disclosure controls and procedures, and internal control over financial reporting designed to ensure the accuracy and completeness of the information reported to the SEC and for the preparation of financial statements;
• require the establishment by all listed companies of an independent audit committee;
• require the disgorgement of compensation by CEOs and CFOs following an accounting misstatement that results from misconduct;
• impose limitations on trading by officers and directors during retirement plan blackout periods;
• prohibit the extension of credit to related parties; and • require the SEC to review a registrant’s filings once every three years. Although relief from compliance with certain of these
requirements was provided to smaller companies, increased compliance costs and increased liability may have had a chilling effect on IPOs.
To (or not to) go public Many commentators have noted that, over time, the US capital markets have become less competitive, and the number of companies seeking to go public has declined. For example, in communications from Congressman Darrell Issa, chairman of the House Committee on Oversight and Government Reform, to Mary Schapiro, chairman of the SEC (discussed further below), Issa noted that the number of IPOs in the US has plummeted from an annual average of 530 during the 1990s to about 126 since 2001, with only 38 in 2008 and 61 in 2009.5
The
number of companies listed on the main US exchanges peaked at more than 7,000 in 1997 and has been declining
ever since – it is now at about 4,000.6Meanwhile, the value
of transactions in private-company shares has grown, almost doubling in 2010 to $4.6 billion from about $2.4 billion in 2009, and was expected to increase to $6.9 billion for 2011.7
Other reports cite similar statistics and
highlight that smaller companies have been disproportionately affected, with most IPOs that are completed involving larger companies and a significant offering size. Although commentators would be ready to stipulate that the number of IPOs is down, there would be little agreement regarding the causes for the decline. Quite a number of different theories have been advanced to explain this phenomenon. Academics active in this area have grouped the theories into two broad categories: first, those attributing the decline to regulatory overreach, and second, those attributing the decline to changes in the ecosystem or market structure changes. Many studies indicate that companies are waiting longer
to go public as a result of anticipated costs associated with Sarbanes-Oxley compliance, as well as the additional costs associated with being a public company. For example, a public company must incur costs for D&O insurance, director compensation (especially audit committees), and disclosure controls and SEC reporting costs. Foreign issuers may be wary of the increased liability that comes with being an SEC-reporting company, as well as of the litigious environment in the United States. Many executive officers of privately-held companies also are concerned that going public will limit their flexibility. As officers of a public company, they are required to make very difficult decisions, including decisions regarding financial reporting, accounting estimates and accounting policies, while they are subject to more scrutiny and more risk as a result of their choices. Given the prospect of shareholder litigation and other litigation concerns, their determinations become fraught with risk. Earnings pressure and the need to respond to many constituencies (such as research analysts, large institutional holders and aggressive hedge fund holders) may affect the decision- making processes. This may inhibit their desire to take risk and may lead them to be more conservative than they otherwise would be. A recent survey found that, in fact, the principal reason given by senior managers of privately- held companies for remaining private is that they would like to preserve decision-making control.8
In addition,
actually conducting an IPO will be time-consuming and expensive given the disclosure and financial statement requirements. Over time, more financing alternatives have developed
for issuers. An issuer could choose to avail itself of one of the exemptions from registration and conduct private
JOBS Act Quick Start 7
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