US public companies are disappearing! This trend is 100% opposite the trend in other developed countries with similar institutions and economic development.
This trend is causing US public companies to disappear. For example, US public company listings decreased over the last two decades by about 46%, from 8,090 in 1996 to 4,331 in 2016, according to a 2018 academic study from the Harvard Kennedy School.[1]
Conversely, public company listings increased by about 48% in other developed countries over a comparable period, according to another academic study in 2015. According to that study, the US “should have had” approximately 9,500 public companies in 2012, resulting in an estimated “listing gap” of approximately 5,400 companies as of 2012. The listing gap is undoubtedly higher today.
This disappearing public company trend has profoundly negative consequences for US job growth. A March 2011 report from the Department of the Treasury’s “IPO Task Force” determined that 92% of the job growth among companies who had gone public occurred after the company’s IPO.
Another negative consequence of the disappearing public company is that as public companies disappear, there are fewer public companies for mutual funds (Vanguard, Fidelity, etc.), pension funds, and the like to invest in. If current trends continue, the “S&P 500” will become the “S&P 250.”
Moreover, not only does staying private thwart US job growth, it deprives mom-and-pop “Main Street” investors of opportunities to invest at the early stage of a business and reap significant gains in value during the business’ early, private years.
To wit, Uber and AirBnB are two well-known companies that have not yet gone public and whose investors (principally Silicon Valley and Wall Street investment firms and high-net worth individuals) are poised to make HUGE sums of money on their investments. In this regard, note the recent news reports that Uber’s proposed IPO market valuation is $120 BILLION. “Main Street” investors will made ZERO from the success of these (and similar) venture capital funded companies because these investment opportunities and similar ones are not made available to them. This statement is not a criticism of the investors who stand to make an enormous amount of money (after all they took a risk with their money and are entitled to a return) – it is simply a statement of fact.
As a counterweight to this trend of income being redistributed to Silicon Valley and Wall Street investment firms and high-net worth individuals, SEC Chairman Jay Clayton wants to let more “Main Street” investors participate in private deals. Within recent months he was quoted in The Wall Street Journal as saying:
- Many companies have shunned the public markets in favor of private investors,
- Regulators have for decades typically walled off most private deals from smaller investors, who must meet stringent income and net worth requirements to participate,
- The SEC is now weighing a major overhaul of rules intended to protect mom-and-pop investors, with the goal of opening up new investment options for them.
We thank Chairman Clayton for recognizing the need for SEC policies that permit more Main Street investors to invest in private deals. But — permitting more Main Street investors to invest in privatedeals does NOT fix the problem of the declining number of US public companies.
CAUSES OF THE “DISAPPEARING” US PUBLIC COMPANY
So, what is behind the precipitous fall in the numbers of US public companies over the past decades? The following factors have played a significant role in this alarming trend:
- More and more companies are turning to the private markets for their capital needs. According to a 2017 Report by the Department of the Treasury, from 2012 through 2016, the debt and equity capital raised through private offerings was 26% higher than that raised through the public markets.
- Smaller-cap companies are not going public. The small (less than $50M – $100M) IPO has practically disappeared. The number of small IPOs averaged 401 in the 1990s, but then dropped to only 105 annually in the 18 years since. In the 1990s, small IPOs comprised 27% of capital raised in the public markets, whereas in the period from 2000 to present they have comprised only 7% of all capital raised. In fact, research shows that the collapse of the smaller IPOs is ~100% responsible for the listing gap between the current number of US public companies and the number of public companies the US “should have.”
- Why are smaller-cap companies not going public or delaying going public until they are larger-cap companies? Answer: because the public company ecosphere is “inhospitable” to smaller-cap public companies, as evidenced by the below:o Regulatory requirements of Sarbanes – Oxley and Dodd-Frank are burdensome
o Smaller-cap companies are vulnerable to “bear raid” attacks by short sellers
o There is little to no sell-side investment analyst coverage
o Buy-side investing trends have changed whereby retail investors are moving to mutual funds, rather than investing in individual stocks
o The threat of class-action lawsuits is a deterrent
o The public company reporting (Form 10Q, 10K, 8K) requirement is a deterrent - As if the preceding reasons were not deleterious enough: public markets also are inhospitable to smaller-cap companies for the following reason: once publicly-traded, the stocks of many smaller-cap companies are likely to be illiquid[2]; and for companies with an illiquid stock, it is virtually impossible to raise non-toxic capital from investment firms because investment firms are reluctant to invest in smaller-cap, illiquid stocks.[3]
- Private company CEOs and CFOs look at all of these in-hospitability factors and determine they simply don’t want to be a public company.
Despite the foregoing, smaller-cap companies can thrive in the public markets. If you are a CEO or CFO of a smaller-cap company with an illiquid stock and your company is struggling to raise non-toxic capital => don’t despair! A subsequent article will provide you specific, actionable recommendations for increasing your company’s stock liquidity.
Subsequent articles will also unveil a policy solution that, if implemented, will reverse the trend of The “Disappearing” US Public Company!
Endnotes
[1] “Hunting High and Low: The Decline of the Small IPO and What to Do About It,” M. Lux and J.Pead, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/working.papers/86_final.pdf.
[2] According to a 2018 SEC study of thinly-traded securities, 3,500 of 8,700 NMS-traded securities had a dismal, median average daily volume of < 50,000 shares per day.The trading volumes of OTC-traded stocks are even more dismal. A subsequent article will provide more detail regarding these dismal trading volumes.
[3] Lack of trading liquidity makes it virtually impossible for investment firms initially to invest through the open market without affecting the stock price – similarly, lack of liquidity makes it virtually impossible for them to exit an investment position through the open market. See an earlier article here that addresses this topic in more detail.
© Ronald A. Woessner, December 2018
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This is a reprint of an article by Mr. Woessner published on December 12, 2018 by equities.com at this link.
Mr. Woessner mentors, advises, and helps raise capital for companies in the start-up and smaller-cap company ecosphere. He also advocates for policies to help smaller-cap companies access capital and for policies that create a more hospitable public company environment for them. For more information on Mr. Woessner’s background, see https://www.linkedin.com/in/ronald-woessner-3645041a/.