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Congress Mulling Legislation to Make IPO’s Easier for Small Businesses

Wednesday, March 21, 2012

The Senate is debating a bill this week that would make it easier for small, privately-held companies to go public, as part of a package of legislation to promote economic growth called the JOBS Act.

The bill — co-sponsored by Senator Charles Schumer — would ease financial reporting requirements for companies with less than $1 billion in annual revenue and a total value under $700 million after they go public.

But critics, including several Democratic senators, have lined up against the bill, arguing that it would roll back regulations passed in the wake of Enron and other corporate fraud scandals.  The head of the Securities and Exchange Commission, Mary Schapiro, said that the legislation will “eliminate important protections for investors in even very large companies” in a letter to the Senate banking committee last week. 

If the bill became law, companies that qualified as “emerging businesses” would only have to file two instead of three years worth of financial statements before selling shares to the public; they wouldn’t have to hire an independent auditor to assess internal controls; and bank analysts would be allowed to promote stocks the same bank is underwriting.

The House passed a similar bill with bipartisan support two weeks ago, and the White House has pledged President Barack Obama will sign the bill if Congress approves it.

These bills seek to address the decline in the number of small companies listing on public exchanges over the last decade, which some critics say is due to the Sarbanes–Oxley Act of 2002 and other financial reporting regulations passed in the wake of corporate fraud scandals, which have made it too expensive, too difficult and too time consuming for small companies to list on public exchanges.

But others blame economic conditions for the stalled IPO market — not regulations.

“The IPO market is really a derivative of the overall economy,” said Kathleen Smith, chairman and co-founder of Renaissance Capital, an IPO investment advisor and research firm. “The issue the IPO market has, has nothing to do with regulation. It has every to do with investors saying ‘Ugh, am I willing to take this risk knowing how risky an IPO can be when it goes down?'"   

It’s often a better business model for small companies to sell themselves to larger companies, said Jay Ritter, a finance professor at the University of Florida who tracks IPOs. A small technology company might sell to Apple instead of taking itself public, he said.

“Apple might be able to pay a higher price than public market investors because Apple can then take the company’s technology, rapidly integrate it into iPads or iPhones and a couple of months later, be selling 10 million units per month,” Ritter explained. “Whereas if it was trying to grow by itself, it would take years and years to scale up.”

Whether small companies go public or fold into larger companies doesn’t change their economic impact, he added.

But Mark Heesen, president of the National Venture Capital Association, disagrees.

 “If you get acquired, what often happens is that the acquirer very often is buying that company for a specific technology, specific product or specific number of employees,” Heesen said. “That company may have a lot of other ideas, a lot of other products that get left on the cutting room floor when that company gets acquired. So you actually lose a lot of juice in that company.”

Moreover, the injection of cash from an IPO encourages hiring, Heesen said. Public companies added 90 percent of their employees after their IPO, according to a study commissioned by the National Venture Capital Association.

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