Two senior Wall Street executives complained this week that over-regulation is discouraging initial public offerings. JPMorgan Chase & Co. CEO Jamie Dimon partly blamed the zeal of securities regulators for the drop in IPOs that began in March 2022, a sentiment echoed by Citadel Securities CEO Peng Zhao.
I’m not convinced we should care about the number of IPOs. It doesn’t pay to fight the market. If companies have found better alternatives, the response should be to anticipate problems and exploit opportunities with those rather than trying to woo companies back to the old paths. Established players like JPMorgan and Citadel often like to keep things the same for markets they dominate, but I tend to root for the little-guy innovators.
IPO numbers remain well below the averages seen in the last 15 years despite having risen from recent lows. There are good reasons to be skeptical though of the view that the slowdown is due to over-regulation.
For one thing, the dearth of IPOs is global, not just a US phenomenon. It seems implausible that European, Japanese and Chinese regulators all tightened at the same time their US counterparts did, and Canada has no national securities regulator. So maybe regulation isn’t the key.
I have also heard the same complaint since the early 1980s when I first came to Wall Street. If people aren’t complaining about excessive regulation, they’re angry that ordinary investors can’t get allocations to IPOs, or that too many overhyped, insubstantial or untested companies are coming to public markets.
During the Obama and Trump administrations there were initiatives to make IPOs easier and cheaper by streamlining regulations, without obvious results. It’s true that the Biden administration and the Securities and Exchange Commission under Gary Gensler have pushed stronger regulation, but IPOs were at record levels more than a year into Biden’s tenure and Gensler’s chairmanship. They only crashed when the Federal Reserve started raising interest rates.
Finally, a big part of the story must be changes in financial markets. Much of the decline has to be the result of direct listings and special purpose acquisition vehicles, or SPACs, offering simpler paths to becoming a public company. While both those are less viable today than the recent past, they explain much of the fall in IPO numbers. A longer-lasting change is the increased liquidity and cheaper capital found in private markets, something that has been particularly important for AI and other companies with the most intense investor interest.
No doubt other factors are playing roles as well: political and geopolitical uncertainty, volatility of interest rates and inflation, fears of recession. And all these only address the supply side — why private companies may not choose to IPO. There’s a demand side as well, and investors have not been inspired by the performance of recent IPOs.
When it comes to regulation, the type is more important than the amount. Regulation can be helpful when it’s focused on protecting investors. Even if it’s excessive, the harm is partially offset by the benefits. But regulation acts as a tax on being public when it has social justice or climate change or other goals that don’t put cash into the pockets of investors. It doesn’t advance the stated goals — merely pushing the behavior it tries to discourage into private markets with even less regulatory oversight and publicity — and reduces both investment returns and diversification opportunities for investors.
In the past, people making the regulation-discourages-IPO argument were attacking essential investor protections like Regulation Fair Disclosure and rules that prevented entrenched boards and managers from cheating shareholders. Today people complain about rules such as the SEC’s climate disclosure regulations or fear that an unrealized capital gains tax will apply only to public companies. (The official Biden administration proposal covers private businesses as well, but many people think it would be impractical to tax unrealized gains without a liquid public market for the equities).
The SEC should get back to being run by securities lawyers who care only about investor rights and protections in a narrow financial and legal context, letting other entities worry about social justice, climate, diversity, inequality and broader issues. Perhaps in a different administration, conservative values would be pushed. Investors need an SEC on their side, undistracted by partisan squabbles.
This is not with a view to encouraging more IPOs. It’s so companies choose what’s right based on their stakeholders’ economic interests rather than whatever is the fad in Washington. Moreover, I care more about the many thousands of companies already public than the hundreds that might IPO in the future.
It’s hard to know how ventures will raise capital in the future, and what their relationships will be with retail investors. Our basic securities laws were written in the New Deal era, ancient history in financial markets. Perhaps there will be no IPOs soon, and companies will use alternative means of going public or rely on private markets for capital. Perhaps retail investors will have little interest in IPOs or even in buying individual stocks, replacing them with mutual funds, exchange-traded funds and newer options.
IPOs may be fading away naturally. Or perhaps this is just another cycle, and they will come roaring back as rates decline and market uncertainties are resolved. There’s no reason for to the SEC to take sides one way or another.
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