IPO Reform

Abstract

The robust Initial Public Offering exit opportunity is central to the health of the venture capital business in this country, and has been for a number of years. As this is written, the IPO ‘window’ is currently closed in the United States. Very few IPOs are underway or effective; and it is unclear when the window will reopen. In fact, public reaction to the recent wave of scandals in the governance of U.S. public companies has resulted, whether rightly or wrongly, in additional obstacles in the way of companies seeking to go public … higher risk of claims of improper disclosures; a shrinking pool of analysts to cover the stock once the company is public; increased costs of maintaining public registration; and the not-so-distant threat of criminal penalties in the event financial results are misstated. Whether the new restrictions and penalties are wise or not is not within the scope of the instant paper. Rather, I explore ways in which, without changing the basic methodology (which has been in place since 1933), the process can be streamlined and modernized. Thus, I am pumping for long overdue structural reforms … designed to remove a good deal of the artificiality and hype from the current IPO process, a process which has been inadvertently regulated to the point it resembles nothing so much as the opening of a Hollywood feature film. The Long Runway Approach (which would not replace, but be an alternative to, the current dynamics would allow, e.g.:: the investing public to become familiar over time with IPO candidates, for the sponsors to test the waters relatively inexpensively; and for the issuer and the investors to get a real fix on the basic question … whether an IPO for their registrant is a good idea. If my fixes are installed, I suggest that the more worthy candidates will be attracted to the IPO opportunity, friction, surprise and artificiality significantly diminished; and the window will open for companies which (like good wine), have been allowed to mature in the public eye before actual trading begins. Investors will be better informed, in my view, and the issuer better understood. There will be less volatility in the stock post the effective date. The IPO will be more accurately priced and, indeed, a much larger universe of interested retail investors will be able to obtain the positions they want … more investor democracy, in other words.