As the number of companies going public decreases, concerns about transparency grow.
Overall, “public markets here are the deepest, they’re the most liquid, and they’re enabling companies to access very large amounts of capital and grow and create jobs,” Securities and Exchange Commissioner Kara Stein said in a recent Insights by Stanford Business article.
But the number of publicly traded companies in the United States was about 4,300 in 2015, down from about 8,000 in 1996, accounting firm Ernst & Young found in a 2017 study. In 2017, 147 initial public offerings, or IPOs, were made, half the average yearly amount in the 1980s and 1990s, according to Jeff Spross, business and economic correspondent for The Week.
There are pros to staying private. One is securing funding from venture capitalists and hedge and private equity funds, the Insights article states. Private investment has doubled in the past decade and outpaces public investment, Spross added.
“Venture capitalists alone committed $28.2 billion in new investments in the first quarter of 2018, and roughly $84 billion for all of 2017,” he wrote. “By contrast, IPOs raised just $17 billion in the first three months of this year, and $50.9 billion in 2017.”
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Additionally, private companies don’t have to worry about regularly submitting disclosures and filings to the SEC. Laws such as the Sarbanes-Oxley Act of 2002 made IPOs more difficult and costly, Spross points out, but efforts to ease those burdens, such as the Jump-Start Our Business Start-Ups Act of 2012, had little effect.
But there are cons to staying private, too. For instance, investors might get frustrated because the public market offers more investor protections, and in general, market transparency clouds as less information flows into the financial ecosystem, affecting decision-making on pricing and valuation, according to the Insights article.
In general, the number of publicly traded companies has fallen, going from a peak of 7,322 in 1996 to 3,761 in 2017—following a similar path to IPOs, Spross wrote. Today, publicly traded companies tend to have at least 5,000 employees and a decade under their belts.
“An IPO used to be the way a new firm ‘came of age,’” he added. “But these days, a promising company often gets gobbled up by a larger, already established competitor instead.”
The concern is that a vicious cycle is perpetuating. As big companies get bigger, that feeds the supply of private equity and “could well lead to less dynamism and growth in the economy overall,” Spross wrote.
To encourage companies to go—and stay—public, Stein is looking at small businesses, particularly the effects of Regulation A+, an alternative to an IPO that makes it easier for small businesses to get capital, and Regulation Crowdfunding, which lets companies sell securities through crowdfunding. She argues that the public market “offers the liquidity that small investors need.”
What’s more, she told Insights, the perks of going public are greater than the costs. “It’s often very good for the company in its process of maturing,” she said. “It brings a greater discipline, but it also helps a company think through how to organize itself as it grows.”