By many accounts, it is rare for presidential aspirants to weigh in on the state of the rather obscure laws and regulations that govern initial public offerings (IPOs) in the United States.
For the U.S. electorate, voters’ interest in capital markets regulation pales in comparison to their interest in health care, trade and tax policy.
Even so, recent comments made by a former presidential aspirant, Sen. Sherrod BrownSherrod Campbell BrownSenate Democrats call for diversity among new Federal Reserve Bank presidents Waters hopes there's no attempt to make deep cuts to housing proposal America can end poverty among its elderly citizens MORE (D-Ohio), during a Senate Banking Committee hearing last week underscore the need for market participants to give voice to the importance of this area of regulatory policy.
During the hearing to consider pending legislation that would advance capital formation and facilitate IPOs, Sen. Brown starkly remarked, “...when I hear some people say we need these bills to facilitate capital formation, I’m not sure what problem they are trying to solve.”
The doubt expressed in his remarks signifies a fundamental lack of understanding as to why IPOs matter and how regulatory policy can help improve the state of the IPO market.
By any measure, the decline in IPOs has been dramatic. There were only 214 IPOs in 2018, reflecting the widely-reported sustained decline in IPOs since the 1990s when on average, 547 IPOs were completed annually.
This decline has led to a decrease in the number of publicly traded companies over the past two decades, falling from 7,322 to 3,671 by 2016.
The decrease in IPOs is even more pronounced when you consider the dramatic increase in the size of the U.S. economy. Since 1996, when IPOs peaked, U.S. GDP has grown over 150 percent, from $8.0 trillion to $20.5 trillion at the end of 2018.
While there are varying views as to the causes of the decline (namely, a deeper private capital market that allows companies to stay private longer) many market participants view the existing regulatory framework as a significant contributing factor, and they advocate for alternatives to the current one-size-fits-all regulatory framework.
It is concerning that years after the JOBS Act debate, there is lingering doubt as to why the vibrancy of the IPO market matters to the well-being of the U.S. economy, particularly job creation.
As noted by the Treasury Department’s IPO Task Force during that debate, 92 percent of job growth occurs after a company’s IPO. Notably, merger and acquisition exits — the principal monetization alternative — result in job losses in the short term as so-called redundancies are eliminated and acquiring companies often have vested interests in legacy businesses and less to gain from innovation.
App-based ride-hail company Lyft’s recently filed IPO prospectus is instructive. The company has over 1.1 million active drivers. Its drivers have earned over $10 billion from Lyft since it was founded in 2012, a remarkable achievement for those who sought full- or part-time work from a flexible gig economy job.
Even more interesting is the feature of the offering that allows Lyft’s most committed drivers to participate in the offering and purchase shares at the IPO price with special one-time bonuses.
This not only produces an alignment of interest in the success of Lyft’s business, but it also provides these drivers with an opportunity for wealth creation from an investment in Lyft’s stock.
We need to teach all presidential candidates as to the real-world benefits of a vibrant IPO market and Lyft’s IPO is the perfect tool for this teachable moment.
The aim of this educational exercise is to remove all doubt that it is time to re-think the IPO and post-IPO regulatory framework for an economy driven by emerging technologies and innovation.
Michael L. Zuppone serves as the chair of the Securities and Capital Markets practice group at Paul Hastings.