One of the main effects of Sarbanes Oxley (SOX) has been a dramatic collapse of the small-cap IPO market due to the prohibitive SOX compliance costs and lack of access to adequate analyst coverage. While lately it seems the IPO market has opened for companies like Groupon and Zynga, the reality is that the IPO market is still reserved for the largest start-ups.
At the same time, we are seeing companies with tremendous success, but on a smaller scale. These companies, while exceeding expectations quarter over quarter, won’t go public for several reasons including:
- SOX compliance costs are excessive
- Securing analyst coverage from a major institution is nearly impossible
- Communicating with investors throughout the IPO process is restricting and highly regulated
Due to these reasons and others, an IPO is a less attractive alternative to these companies, despite their success. Small-cap companies are driving job creation and opportunity in America and abroad and small company IPOs are important drivers of economic growth.
For these reasons, we are supporting Senate Bill S. 1933. This legislation would create a regulatory on-ramp for smaller companies (less than $1 billion in revenues) for up to the first five years after an IPO. In addition to offering temporary relief from onerous and costly provisions like Sarbanes Oxley, the proposed legislation also allows for these companies to more effectively communicate with investors before, during and after the offering, creating safe harbors for additional analyst research coverage and allowing an expanded range of pre-filing communications. The provisions also permit confidential pre-filing of draft registration statements for emerging growth companies in order to protect competitive information while making decisions about the feasibility of an IPO.
At NVP, we’ve always rolled up our sleeves to help our companies in any way we can. Supporting this bill is another way to help our own entrepreneurs, as well as all emerging growth companies looking to enter the public markets, as they aim to build significant and lasting businesses.
We are not alone in our support for this bill. The National Venture Capital Association (NVCA) has helped this bill gain tremendous support, and we stand by these efforts. You can find more information on S. 1933 on the NVCA website. We want to see entrepreneurs continue to drive economic growth at a global level and we believe S. 1933 will further that goal.