Seven million new jobs. That’s what America needs just to return to our prerecession employment levels. To help us climb out of this hole, America’s entrepreneurs need better access to financial capital they can use to bring innovations to market, expand their operations and – most important – hire more workers.
Statistics show that small- and mid-size businesses – those with fewer than 500 employees –provide 60 to 80 percent of new private-sector jobs created annually. In fact, many leading companies in Minnesota began as small enterprises that became public companies through initial public offerings (IPOs). For example, Regis, Stratasys, SPS Commerce, American Medical Systems and Buffalo Wild Wings all had IPOs that raised less than $100 million.
Remaining a private company is a viable path to growth for some, often leveraging the resources and expertise of private equity firms. However, the health of our public capital markets – and small businesses’ ability to access them – are critical to the economy and job growth.
As the Star Tribune has recently covered in its “New ideas, no money” series, today the number of companies taking the public path to prosperity has ground nearly to a halt. Moreover, small IPOs in particular have virtually disappeared from the marketplace. From 1991 to 1997, the vast majority – 80 percent – of IPOs raised less than $50 million. Last year, a mere 16 percent of IPOs in the United States were of that size.
Complex reasons for the decline
The reasons behind the decline are complex and often misunderstood. While the increased costs of complying with the Sarbanes-Oxley Act are frequently cited, the true causes lie in the numerous regulatory changes that have harmed what once was the world’s most efficient and attractive capital market.
These changes date back to 1997 with the SEC’s introduction of new order handling rules. Regulatory changes intended to increase transparency instead ruined the underlying structure of the market. The cumulative effects of these changes, combined with technological advances, destroyed the economics available to investment banks that once provided critical support and liquidity to public companies.
The reality is that entrepreneurs no longer have as vibrant of an IPO market as an exit option as they did for decades.
Fortunately, some leaders on Capitol Hill – including Rep. Erik Paulsen of Minnesota – recognize the need to revive the IPO market for small companies. Paulsen is a sponsor of the Small Company Capital Formation Act of 2011, a bill introduced by Rep. David Schweikert of Arizona.
The bill would amend a key regulation in the Securities Act of 1933. “Regulation A” was intended to give small businesses easier access to equity capital by allowing them to use an IPO process that’s simpler and less expensive than that required for larger companies.
Three key measures
Under the new bill, the amount of capital small businesses could raise under the Regulation A process would increase from $5 million to $50 million. The bill proposes three key measures that will greatly benefit small companies. First, it drives down costs for issuers by permitting the use of a simpler “Offering Circular” for the SEC’s review. Second, it opens up the Regulation A exemption to a size that will allow companies to list on the NYSE and NASDAQ and to avail themselves of the so-called “Blue Sky” exemption, thus avoiding costly state-by-state filings. The current Regulation A limit of $5 million is below NYSE and NASDAQ listing minimums. Third, it allows issuers to gauge the viability of an offering by meeting with investors before incurring the significant costs of an offering.
As an early proponent of the Small Company Capital Formation Act, Grant Thornton has been working with lawmakers and has made recommendations to the bill’s sponsors that we believe would further improve Regulation A and protect investors.
As the bill proceeds through the legislative process, it deserves the attention and endorsement of Congress and the American business community. The Small Company Capital Formation Act of 2011 is a first step toward improving public capital-raising opportunities for emerging companies in Minnesota and beyond. It also holds the greater promise of spurring business innovation, generating new jobs and helping revitalize the U.S. economy.
Jarod Allerheiligen is the managing partner for the Minneapolis office of Grant Thornton LLP. He can be reached at firstname.lastname@example.org