Rebuilding the IPO On-Ramp

Today, the IPO Task Force, a group of private sector professionals operating in the emerging growth company ecosystem, released formal recommendations to help re-energize the U.S. capital markets system. Spearheaded by former National Venture Capital Association (NVCA) chairman, Kate Mitchell, the task force authored a detailed report entitled Rebuilding the IPO On-Ramp: Putting Emerging Growth Companies and the Job Market Back on the Road to Growth which outlines three major areas in which government can help smooth the path to IPO for these important companies.

The NVCA participated on the task force and is very supportive of its efforts. The NVCA is encouraged by the interest the recommendations have generated in initial meetings with Congress, regulators and the Administration and look forward to seeing them become part of the dialogue around legislative and regulatory initiatives to address the capital markets issue.

EXECUTIVE SUMMARY

This report recommends specific measures that policymakers can use to increase U.S. job creation and drive overall economic growth by improving access to the public markets for emerging, high-growth companies.

For most of the last century, America’s most promising young companies have pursued initial public offerings (IPOs) to access the additional capital they need to hire new employees, develop their products and expand their businesses globally. Often the most significant step in a company’s development, IPOs have enabled these innovative, high-growth companies to generate new jobs and revenue for the U.S. economy, while investors of all types have harnessed that growth to build their portfolios and retirement accounts. We refer to these companies in this report as “emerging growth” companies.

During the past 15 years, the number of emerging growth companies entering the capital markets through IPOs has plummeted relative to historical norms. This trend has transcended economic cycles during that period and has hobbled U.S. job creation. In fact, by one estimate, the decline of the U.S. IPO market had cost America as many as 22 million jobs through 2009.(1) During this same period, competition from foreign capital markets has intensified. This dearth of emerging growth IPOs and the diversion of global capital away from the U.S. markets – once the international destination of choice – have stagnated American job growth and threaten to undermine U.S. economic primacy for decades to come.

In response to growing concerns, the U.S. Treasury Department in March 2011 convened the Access to Capital Conference to gather insights from capital markets participants and solicit recommendations for how to restore access to capital for emerging companies – especially public capital through the IPO market. Arising from one of the conference’s working group conversations, a small group of professionals representing the entire ecosystem of emerging growth companies – venture capitalists, experienced CEOs, public investors, securities lawyers, academicians and investment bankers – decided to form the IPO Task Force to examine the conditions leading to the IPO crisis and to provide recommendations for restoring effective access to the public markets for emerging, high-growth companies.

In summary, the IPO Task Force has concluded that the cumulative effect of a sequence of regulatory actions, rather than one single event, lies at the heart of the crisis. While mostly aimed at protecting investors from behaviors and risks presented by the largest companies, these regulations and related market practices have:

1. driven up costs for emerging growth companies looking to go public, thus reducing the supply of such companies,

2. constrained the amount of information available to investors about such companies, thus making emerging

growth stocks more difficult to understand and invest in, and
3. shifted the economics of the trading of public shares of stock away from long-term investing in emerging growth companies and toward high-frequency trading of large-cap stocks, thus making the IPO process less attractive to, and more difficult for, emerging growth companies.

These outcomes contradict the spirit and intent of more than 75 years of U.S. securities regulation, which originally sought to provide investor protection through increased information and market transparency, and to encourage broad investor participation through fair and equal access to the public markets.

To help clear these obstacles for emerging growth companies, the IPO Task Force has developed four specific and actionable recommendations for policymakers and members of the emerging growth company ecosystem to foster U.S. job creation by restoring effective access to capital for emerging growth companies. Developed to be targeted,
scalable and in some cases temporary, these recommendations aim to bring the existing regulatory structure in line with current market realities while remaining consistent with investor protection. The task force’s recommendations for policymakers are:

1. Provide an “On-Ramp” for emerging growth companies using existing principles of scaled regulation. We recommend that companies with total annual gross revenue of less than $1 billion at IPO registration and that are not recognized by the SEC as “well-known seasoned issuers” be given up to five years from the date of their
IPOs to scale up to compliance. Doing so would reduce costs for companies while still adhering to the first principle of investor protection.

2. Improve the availability and flow of information for investors before and after an IPO. We recommend improving the flow of information to investors about emerging growth companies before and after an IPO by increasing the availability of company information and research in a manner that accounts for technological and
communications advances that have occurred in recent decades. Doing so would increase visibility for emerging growth companies while maintaining existing regulatory restrictions appropriately designed to curb past abuses.

3. Lower the capital gains tax rate for investors who purchase shares in an IPO and hold these shares for a minimum of two years. A lower rate would encourage long-term investors to step up and commit to an allocation of shares at the IPO versus waiting to see if the company goes public and how it trades after its IPO. (

In addition to its recommendations for policymakers, the task force has also developed a recommendation for members of the emerging growth company ecosystem:

4. Educate issuers about how to succeed in the new capital markets environment. The task force recommends improved education and involvement for management and board members in the choice of investment banking syndicate and the allocation of its shares to appropriate long-term investors in its stock. Doing so will help emerging growth companies become better consumers of investment banking services, as well as reconnect buyers and sellers of emerging company stocks more efficiently in an ecosystem that is now dominated by the high-frequency trading of large cap stocks.

The recommendations above aim to adjust the scale of current regulations without changing their spirit. Furthermore, the task force believes that taking these reasonable and measured steps would reconnect emerging companies with public capital and re-energize U.S. job creation and economic growth – all while enabling the broadest range of investors to participate in that growth. The time to take these steps is now, as the opportunity to do so before ceding ground to our global competitors is slipping away.

For this reason, the members of the IPO Task Force pledge their continued participation and support of this effort to put emerging growth companies, investors and the U.S. job market back on the path to growth.