SEC Commissioner Hester M. Peirce cited ongoing regulatory costs as a material factor in the decrease in IPOs in recent years and recommended ways to reverse the trend.

In remarks to the Washington State Bar Association, Ms. Peirce agreed, in part, with her colleague Commissioner Robert J. Jackson's statements, crediting non-regulatory factors for the decrease in IPOs. She asserted, however, that certain regulatory policies have disincentivized companies from going public. According to Ms. Peirce, companies are concerned about:

  • the implementation of burdensome regulatory mandates, as demonstrated by the requirements under Sarbanes-Oxley Act Section 404(b) and the Dodd-Frank Act;
  • pressure for companies to manage themselves "with an eye toward something other than maximizing the company's long-term value"; and
  • the potential damage that low trading volume may have on operations.

In order to facilitate capital formation and increase IPOs, Ms. Peirce advised, regulators should improve access to capital beginning with the "smallest, newest companies." Ms. Peirce encouraged regulators to (i) improve access to public markets for companies, (ii) open private markets to more investors, and (iii) change how issuers find investors.

Ms. Peirce called for improving geographic disparities in markets. She argued that the accredited investor standard benefits geographic areas with more accredited investors, such as San Francisco, Seattle and New York, over other cities, such as those in the Midwest. Ms. Peirce noted that networks "to help connect promising companies and potential investors" are absent in areas with a lesser concentration of startups. To remedy this, Ms. Peirce promoted a "finders" exemption to allow "infrequent matchmakers to be paid to help investors and entrepreneurs find each other."

Ms. Peirce reiterated her call for regulators to address initial coin offerings when considering reforms to capital access. She advocated for the creation of an Office of Innovation within the SEC to address inquiries related to "new technologies, platforms, and products."

Commentary / Steven Lofchie

The divide between economic philosophies is well illustrated by the differing approaches that Commissioners Peirce and Jackson take to asking why there has been a long-term downward trend in the number of IPOs. Commissioner Peirce raises the long-term costs of regulation; Commissioner Jackson suggests that if there were more regulation, underwriters could be encouraged to charge lower underwriting fees. Commissioner Peirce is closer to the heart of the matter than Commissioner Jackson, but both pose reasonable questions.

Commissioner Jackson ought to address whether the SEC's proposed new Best Interest Requirement will discourage broker-dealers from selling IPOs to retail investors, particularly given the materially increased suitability burdens and litigation risks. See Cadwalader Attorneys Analyze SEC's "Retail Best Interest" and Fiduciary Guidance Proposals. Commissioner Jackson bemoans the fact that retail investors do not have access to investment in growth companies. But the Best Interest Requirement makes it far more prudent for broker-dealers to offer retail investors a choice of diversified mutual funds, not IPOs. It is not obvious that one can both facilitate retail investors participating in the upside of risky growth companies and, at the same time, impose material sanctions on broker-dealers that are insufficiently "prudent" (judged after the fact) in making any "recommendation" (undefined term, but hard to see how you sell an IPO without making a recommendation) to a natural person. Put another way, if the SEC determines that it wants to discourage broker-dealers from selling products with risk to retail investors (which would be a reasonable determination), then it must accept the fact that retail investors will have even less access to IPOs. It is a trade-off.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.