Some of these findings were incorporated this fall into a report of President Obama’s Council on Jobs and Competitiveness. As the council noted: “Well-intentioned regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies. As a result, fewer high-growth entrepreneurial companies are going public. . . . This hurts job creation, as the data clearly shows that job creation accelerates when companies go public.”
The JOBS Act would significantly reduce these burdens. It does so in two main ways.
First, it lifts the “threshold” at which a business must register with the Securities and Exchange Commission from 500 to 1,000 shareholders (and to 2,000 shareholders for community banks), and exempts employee shareholders from this count. Companies registered with the SEC are subject to most of the provisions of Sarbanes-Oxley, some provisions of Dodd-Frank, and numerous other SEC mandates.
As Senator Pat Toomey (R., Pa.) explained recently on the Corner, with a higher shareholder limit, “small- and medium-sized businesses will have greater access to privately raised capital, and greater opportunities for growth.” And by exempting employees from the count, the JOBS Act offers greater opportunities for workers to become owners and share in the wealth.
Second, if a company wants to raise substantially more capital by going public, the JOBS Act gives it a running head start, temporarily exempting it from some of the most burdensome mandates of Sarbanes-Oxley and Dodd-Frank. Under the JOBS Act, companies launching an IPO would be exempt from these rules until their fifth anniversary of going public, reaching $1 billion in annual revenues, or reaching $700 million in market valuation, whichever comes first.
It is clear that companies create more jobs when they go public; virtually no one has disputed the IPO Task Force’s finding that 90 percent of a public company’s job creation occurs after it goes public. Rather, JOBS Act opponents claim that reducing regulation won’t encourage IPOs.
To explain the current decline in IPOs, these opponents typically point to the bad economy. This theory is easily refuted by a simple look at IPO numbers over the last two decades. In the years since Sarbanes-Oxley was passed in 2002 — a span that included good economic times as well as bad — not once has the number of IPOs come close to the numbers recorded during the slow-growth years of the early 1990s, let alone the boom years of the later part of that decade. As I noted in testimony to the House Energy and Commerce Committee, using data I compiled from the IPO Task Force report, there were about 50 more IPOs in 1991 than there were in 2006 or 2007, relatively good years for economic growth. The decline is especially severe among small firms; as noted by the Obama jobs council, “the share of IPOs that were smaller [in market valuation] than $50 million fell from 80 percent in the 1990s to 20 percent in the 2000s.”