Letters to the Editor: We Must Make Smaller-Company IPOs Much Easier
November 04, 2011
The following “Letter to the Editor” appeared in the November 4, 2011 issue of The Wall Street Journal.
David Weild’s “How to Revive Small-Cap IPOs” (op-ed, Oct. 28) correctly identifies the root causes of the dramatic decline in small-company initial public offerings and its connection to significant job loss in America.
One irony inherent in the regulatory interventions and correlated market practices that have devastated the small-cap IPO market is that although the regulations were intended to deter conduct and risk associated with large-cap companies, the enormous regulatory burdens have fallen disproportionately on smaller, emerging companies. These lack the financial resources and infrastructure to absorb the enhanced compliance and disclosure requirements. Emerging growth companies are paying for the sins of Enron, WorldCom and other large-cap firms that engaged in fraud and other wrongdoing.
The regulatory interventions have also resulted in a precipitous decline in the amount of research information being made available on smaller companies.
The one-size-fits-all regulatory regime should be replaced with a scaled approach whereby emerging growth companies would transition into the SEC’s disclosure and compliance regime over a period of years following an IPO. This is one of the main recommendations recently issued by the U.S. IPO Task Force. The members of the task force are themselves the very emerging growth-company ecosystem participants—entrepreneurs, venture capitalists, public investors, investment bankers and securities lawyers—who possess the greatest understanding of how emerging companies form capital, innovate, grow and create jobs.
The need for meaningful small-cap IPO reform is urgent, as we continue to lose public offerings and jobs to foreign markets. Such reform will probably have to originate in Congress and not in the SEC, however, because the latter’s resources have been diverted to Dodd-Frank rulemaking and enforcement.
Alon Y. Kapen is a partner in Farrell Fritz, P.C.’s corporate and securities departments.
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