In fact, there is considerable evidence that IPOs helped power the U.S. out of the early-1990s recession and into the boom. Among the stock offerings in those years were the now-familiar corporate names of Cisco Systems in 1990, Starbucks in 1992, and PetSmart in 1993. With the 1990s as a backdrop, a 2009 academic paper concludes that “greater flexibility in issuing equity . . . allows for milder business cycles.”
But today, the flexibility to issue equity has been greatly impeded by Sarbanes-Oxley. The SEC has found that one aspect of the law that is tackled by the JOBS Act, the “internal-control mandates” of Section 404, alone costs public companies an average of $2.3 million per year. And a 2011 study found that these mandates cost even the smallest public firms an average of more than $1 million a year. “Effects of this order of magnitude could cause private companies to simply forgo growth opportunities and stay small,” the study concludes.
Who knows how many jobs or how much wealth these firms could create if liberated from this red tape? Home Depot co-founder Bernie Marcus, whose firm raised capital by going public in 1981, when it had just four stores, has said that the company likely would not have gotten off the ground if today’s regulations had been in effect. And if Home Depot hadn’t succeeded, jobs would not have been the only thing that was lost. Millions of dollars of wealth would not have been created for the ordinary investor who took risk but grew rich with the company.
The JOBS Act does nothing to deter the vigorous prosecution of fraud under federal and state law. Investors, however, will be more able to choose the level of risk they wish to assume. And remember that despite Sarbanes-Oxley, Lehman Brothers and General Motors still imploded, as no stock can be 100 percent risk-free.
To paraphrase my boss, there will still be 9,999 commandments from the government even after the JOBS Act is signed, with many more still coming from the Obama administration. But with this breather from regulations that impede essential capital-market functions, Obama and the GOP House have definitely made a good start.
— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.