SEC concerned about regulating too tightly?
The SEC also has yet to adopt final rules about the fiduciary duties of investment advisors and broker-dealers, which Roper described as the biggest investor victory in the Dodd-Frank debate. A staff recommendation on those rules is expected by the end of the year, Burns said.
Also pending is SEC action to enforce another provision of Dodd-Frank, which would make credit rating agencies subject to expert liability for the grades they give to asset-backed securities. After the SEC’s announcement that it would allow such securities to be sold without a disclosed credit rating drew critical press coverage and objections from Massachusetts Attorney General Martha Coakley, Schapiro wrote that the Commission is “working on extensive changes to the regulations that would improve several aspects of asset-backed securities regulation” and is “continu[ing] to monitor the issue.”
Regardless of how those broader issues are resolved, critics said, the focus on lightening the load on small businesses could prove harmful. “If I’m an investor, it doesn’t matter if I’m ripped off by a small company or a big company,” said Crawford. “I’ve still lost my money.”
Is the SEC chasing a problem that doesn’t exist?
Underlying the debate on the SEC’s re-examination of regulations on small and emerging companies is an even more basic question: Are small companies facing burdens in their ability to attract capital that will allow them to expand? And how would we know?
In a March 22 letter to SEC Chairman Mary Schapiro, Rep. Darrell Issa pointed to the declining number of initial public offerings (IPOs), and a commensurate decline in the number of publicly listed companies, as one sign of weakness in the U.S. capital markets.
In fact, the rate of IPOs has declined dramatically. In the middle of the last decade, the number of new offerings never recovered to their pre-tech bubble levels, and the IPO rate cratered again in the financial crisis. But a number of investor advocates and other market observers have questioned either how significant this trend is, or whether it can be tied to an increase in regulation.
One of the key figures sounding the alarm about the decline in IPOs is David Weild, a senior advisor for the firm Grant Thornton LLP. In a November 2008 white paper, Weild and co-author Edward Kim argued that the soft IPO market — which was leading small, young companies to be acquired by larger firms, rather than raising capital and seeking to grow on their own — was “leav[ing] a lot of shareholder return, economic growth and job formation on the table.”
But, they added, “while Sarbanes-Oxley did increase the costs and time required to go public, it is a bit of a red herring in that it is only one factor, and probably not the major factor, in the demise of the IPO market.” A bigger role, they wrote, had been played by the shifting economics of the investment marketplace, including the rise of day trading and decimalization.
Similarly, a 2007 Goldman Sachs report argued that a shift in registered listings from the U.S. to foreign exchanges was “a consequence of economic and geographic factors,” including global development, more so than regulatory changes within the U.S.
Other observers, meanwhile, questioned the idea that policies should be designed to encourage companies to go public. The late-90s IPO boom, said Barbara Roper, director of investor protection for the Consumer Federation of America, probably led some companies to go public before they were ready to take on the responsibilities to shareholders that step required. That class of businesses, Roper said, then became part of an entrenched pressure group pushing for more lenient rules on smaller public companies.
The debate may have important implications in shaping decisions about regulation. While he has pointed to other factors to explain the decline in IPOs, Weild, in recent testimony to a House subcommittee, did endorse the Small Company Capital Formation Act, which would allow business to make offerings of up to $50 million without registering with the SEC. But he suggested that the filing of audited financial statements be mandatory for those companies, and that they be required to make periodic financial disclosures that mimic those of registered companies.
Investor advocates, though, worry that potential rule changes may represent a slippery slope of excessive deregulation. For example, one group with an interest in relaxed IPO rules might be venture capital firms, which provide funding to small private businesses in hopes of profiting when they go public. As the SEC constructs its new Advisory Committee on Small and Emerging Companies, “the appointment of representatives…who put their self or business interests ahead of investors would be very worrisome,” said Lynn Turner, a former chief accountant for the Commission. He cited the potential appointment of representatives of venture capital firms as illustrating the problem.
And Scott Shane, an economist at Case Western Reserve University, said the conversation raised questions about priorities.
While the decline in IPOs was not itself proof of a regulatory problem, it might warrant a closer look, Shane said. But even in a strong IPO market, that tool only helps a tiny fraction of small companies — those with the potential for high growth. For most small companies, access to credit — which is now compromised because of continuing weakness in the housing sector — is a more pressing concern, he said.
“If we’re worried about the issues that the SEC is investigating,” said Shane, “are we worrying about the most important set of questions related to financing businesses in the US?” The question of how and whether to encourage more IPOs may be important, he said. “It’s just that I think you get a bigger impact if you worry about some other things.”