The IPO Task Force is calling upon regulators and lawmakers to clear roadblocks for smaller companies to go public, after more than a decade in which the volume of emerging stage IPOs has been stagnant compared to prior years.
“It’s unrelated to economic cycles,” said Kate Mitchell, who serves as chairwoman of the organization and is co-founder of Scale Venture Partners. Small market companies are “significantly under represented” in this year’s IPO class. And they have been increasingly pushed out of the picture in the last decade.
The task force is calling upon regulators to provide a five-year “grace period” for companies to fully comply with some rules. Exempt entities would include companies with less than $1 billion in gross revenues at the time of their IPO registration. The IPO Task Force wants to reduce requirements to two years of audited financial statements at a company’s IPO, instead of three. It would also create temporary exemptions from say-on-pay votes, CEO pay ratio requirements, pay-for-performance disclosure requirements and an exemption from the auditor attestation of ICFR — SOX 404(b).
Eliminating and scaling back these obstacles will save emerging companies up to 50% on the estimated $3.5 million cost of going, and staying, public, the task force said.
Additionally, proponents of a more robust IPO market for emerging stage companies say they want to create tax breaks for any investors willing to employ the seemingly-abandoned “buy and hold” strategy, and keep stocks of smaller companies for at least two years post-IPO.
Further, the task force wants to provide more data to investors pre-IPO, to further entice their investment while simultaneously doing away with antiquated legislation that has hampered startups. This includes allowing broker-dealers to provide research on companies immediately after they go public.
The task force’s move comes as secondary markets have gained substantial traction with investors across the last 12 months, creating exit opportunities for VCs. Still, in that time, more VCs, startups and regulators have continued to regard these largely-unregulated exchanges with growing ire.
Perhaps underscoring the urgency of the matter, Mitchell said there is dialogue on these framework alterations in Washington already. The task force declined to identify any of their political allies.
The shift in IPO market regulations would enhance VCs’ ability to make exits on public exchanges and less dependent on M&A with strategics. Marketing the prospect of IPO de-regulation more broadly, proponents of the rule changes said a more robust emerging stage IPO market would in turn attract more capital to develop operations, and spur job growth. Coming as both corporate and government job rolls are expected to be trimmed to meet budget requirements, the prospect of creating a healthier employment market should seem enticing on both sides of the aisle on Capitol Hill, as well as to lawmakers’ constituents.
While some proponents of tougher regulations for companies going public point to the late-90s crash that claimed so much startup (and investor) capital that took the plunge on IPOs before company revenue streams had fully formed, they cannot debate that it takes substantially longer for companies to get listed on exchanges. Since 2007, the mean amount of time companies typically spent private has more than doubled, to more than nine years, from an average of less than five years in the 80s.
The IPO Task Force consists of Kate Mitchell, who chairs the group, and Joel Trotter, Deputy Chair of Corporate Department, Latham & Watkins and Steve Bochner, CEO of Wilson Sonsini Goodrich & Rosati, among others.