En collaboration avec Jon Hartsel*.
Are public markets broken? In the 1990s Yahoo held an initial public offering a year after incorporation. Uber, which went public last week, was founded in 2009; Airbnb, whose IPO is expected later this year, in 2008.
The problem goes deeper than delayed IPOs: The number of companies on the public market has plunged to about half what it was in the 1990s and has fallen by nearly a quarter since the 2002 Sarbanes-Oxley bill. The decline echoes across the startup world; in 1996, 70% of venture capital exits were to public markets, but today roughly 85% go instead to acquisitions. Meanwhile, the size of the average listed company has doubled since 1994. Taken together, public markets are increasingly a plaything of the rich.
Some say cost-cutting technology has made this the new norm—firms don’t need the money. But Canada isn’t experiencing anything like America’s publicly traded die-off. In fact, Canada now has just over 75% as many listed firms as the U.S., despite a population one-ninth as large. Capital investment as a percentage of gross domestic product has soared, outstripping U.S. levels by 20% in 2016.
The difference is Canada’s regulatory approach. Start with Sarbanes-Oxley, which imposed draconian punishments for accounting errors. The Canadian version, Bill 198, proved far more attractive to listings. The number of publicly listed companies in Canada nearly tripled the year after the law passed and has held relatively steady over the past 15 years.
Bill 198 has several important differences with Sarbanes-Oxley, which make it much less threatening. Canadian companies must provide only a “reasonable assurance” against misstatements, unlike the U.S. requirement to safeguard against even a “remote chance” of misstatement. The U.S. auditing board has been far more aggressive, even sometimes conducting annual inspections of auditors themselves. Overall, Canadian regulators have a lighter touch, which cuts compliance costs and makes it easier for firms to list. It can take as little as 50,000 Canadian dollars (US$37,500) to list on the TSX-Venture exchange and requires only C$500,000 in annual revenue. The comparable U.S. thresholds are several times as high.
Costs and risks are soaring in the U.S. According to PwC, it can cost an American business more than $2 million annually simply to maintain a public listing, on top of the one-time costs for the typical IPO, which range from $10 million to $34 million. This alone pushes out small business. More ominously, aggressive statement policing may scare away innovation, which is risky, after all, and usually entails more than a “remote chance” of mistakes.
The U.S. would benefit if it took some cues from Canada and adopted a less confrontational approach with lower compliance costs—lest the Securities and Exchange Commission end up killing the public markets it is supposed to protect.
Peter St. Onge est Senior Fellow à l’IEDM, Jon Hartsel est directeur de la recherche et gestionnaire de portefeuille chez Donald Smith & Co., à New York. Ils signent ce texte à titre personnel.