U.S. Securities and Exchange Commission chair Jay Clayton recently expressed worry about the state of the U.S. initial public offering, saying, “I do wish that companies were looking to access our public capital markets earlier in their life cycle” so that “retail investors have an opportunity to participate in the growth.”
Indeed, he should worry, as large U.S. technology companies such as Uber Technologies Inc. and Airbnb Inc. are nowadays taking a decade to go public – in contrast to the one to three years it took companies such as Yahoo and Amazon.com Inc. in the 1990s. As a result, small investors are increasingly shut out from early gains, while U.S. public markets are increasingly closed to startups.
But the U.S. problem goes much deeper than delayed IPOs: The U.S. publicly traded company is itself undergoing something of a mass extinction. The number of companies has plunged by half since the 1990s, and nearly a quarter just since the 2002 Sarbanes-Oxley Act. The decline echoes across the U.S. startup world; in 1996, 70 per cent of venture-capital exits were to public markets, but today 85 per cent of exits go instead to acquisitions. Meanwhile, the size of the average listed firm in the United States has nearly doubled. Taken together, public markets are increasingly a plaything of the rich, with regular investors and smaller startups shut out.
Amid this U.S. carnage, the trends in Canada are strikingly different: Listed firms in Canada have doubled since the 1990s, with steady growth from 2002 to 2015. Canada has not just avoided the extinction event, it has positively soared.
One key distinction between the countries is a different approach to financial regulation. The United States’ 2002 Sarbanes-Oxley law imposed draconian punishments for accounting errors. The Canadian analogue, Bill 198, has proven far more attractive to listings. Indeed, the number of publicly listed companies in Canada nearly tripled the year after both laws were passed, and has held relatively steady over the past 15 years even as U.S. listings declined.
Bill 198 has several important differences with Sarbanes-Oxley, combining to form a much less threatening regulatory approach. Canadian companies are asked to provide merely a “reasonable assurance” against misstatements, unlike the U.S. requirement to safeguard against a “remote chance” of misstatement. Furthermore, the U.S. auditing board has been far more aggressive, even conducting annual inspections of auditors themselves. The overall tone of Canadian regulators has been to help companies comply, rather than hunting scalps.
This lighter Canadian regulatory touch contributes to an environment that is far cheaper, with more leeway in terms of financial requirements. It can cost as little as $50,000 to list on the TSX-Venture exchange, with just $500,000 in annual revenue – both several times lower than comparable U.S. figures.
The results are striking: Canada now has nearly half as many listed firms as the United States, despite a population nine times smaller. Meanwhile, capital investment as a percentage of gross domestic product has soared in Canada, from 10 per cent below U.S. levels in 2002 to 20 per cent higher in 2016. This is a dramatic reversal of Canada’s traditional weakness in capital investment. In per capita terms, Canada now has seven times more publicly listed firms than the United States, a gap approximately as large as that between the United States and Mexico.
In contrast, costs and risks are soaring in the United States. According to Ernst & Young, it costs an American business up to US$2.5-million a year simply to maintain a public listing, on top of the more than US$13-million just in adviser fees for the IPO itself. This alone pushes out small businesses. More ominously, aggressive policing of statements could scare public companies away from innovation altogether. Innovation is risky, after all, and usually offers more than a “remote chance” of mistakes.
While Canada has managed a fantastic record since the 1990s, newer trends are more ominous. Since 2015, especially, the number of Canadian companies has begun falling, mirroring the U.S. trend. Compliance costs from Bill 182, intrusion into corporate governance such as executive compensation, and the recent rise in shareholder lawsuits suggest Canada is in danger of following the self-destructive path blazed by the United States. After all, simply being less-bad than the United States is not necessarily a sustainable regulatory strategy. Canada should continue reducing burdens to the country’s public firms so that they can continue to create jobs and investment opportunities for middle-class Canadians.
Michel Kelly-Gagnon est président et directeur général de l’Institut économique de Montréal, Peter St. Onge est Senior Fellow à l’IEDM. Ils signent ce texte à titre personnel.