Death of the IPO

David Weild, a board member of the National Investor Relations Institute’s New York chapter, has been getting a lot of attention recently for his hefty white paper, ‘A wake-up call for America’, co-authored by Edward Kim and released by Grant Thornton, an accounting and advisory firm.

The authors say the US has sunk into ‘the Great Depression in listings’ and propose radical cures. The report paints a stark picture: since 1991, the number of US exchange-listed companies has fallen more than 22 percent, which is 53 percent when adjusted for real GDP growth. In other words, the US would need twice as many listed companies as it currently has just to match 1991 levels. Just to stay even, the US needs 360 new listings per year, a pace last seen in 2000. The average since 2001 has not even been close to this level at 166 IPOs per year, with only 54 in 2008. This year will see even fewer.

The shrinking number of listed companies in the US has been a topic of intense debate for several years and many commentators have laid the blame for the listings decline on high compliance costs for public companies, especially in the aftermath of Sarbanes-Oxley (SOX) and related governance rule making. Others contribute the decline to the rise and improved functionally of other markets in Europe and Asia, many of which have more relaxed listing standards that make it easier and faster for companies to come to market, and attract companies that may have otherwise listed in the US.

The authors of the report, however, say strict US listing standards are not the primary cause of the decline in listings but, rather, it is due to market structure changes over the last decade stripping away the support given to issuers by the sell side.

‘Wall Street used to provide support in terms of research, sales and capital commitment, but that has all been shifted back onto listed firms,’ says Weild, capital markets adviser at Grant Thornton and former vice chair of NASDAQ OMX. ‘There’s no longer the economic incentive to write research or get on the phone and sell a stock story. Market structure essentially destroyed the IR function that was Wall Street.’

The root causes of this decline in sell-side coverage were the introduction of online brokers in 1996 and new order-handling rules in 1997. Other contributing factors include decimalization, SOX in 2002 and Eliot Spitzer’s global research settlement in 2003.

‘Wake-up call’ is the culmination of Weild’s and Kim’s work that began with a November 2008 paper, ‘Why are IPOs in the ICU?’, which was updated in October 2009. The latest paper won Weild mention in the Wall Street Journal and the Financial Times and inquiries from Reuters, the Economist, Fortune and Forbes. He even appeared recently on Bloomberg Television with Senator Ted Kaufman, who is calling on the SEC to rein in dark pools and high-frequency trading.

The study raises some concerning trends. The average time small companies backed by venture capital take to come to market and launch an IPO has more than doubled in the past decade. The authors also say the lack of listings has cost the US around 22 million jobs.

The solution Weild and Kim propose is twofold: a new alternative public market segment along the lines of the old NYSE or NASDAQ, with a fixed spread and commission structure that would provide incentives for market makers to support issuers; and enhancements to the 144A private market for qualified investors.

On the ‘Wake-up call’ website, where the white paper is available to download, Grant Thornton calls on the SEC to hold hearings on the listings depression, and urges market participants to email members of Congress to demand action.