As easy as it is to be cynical these days about the effectiveness of government programs, it’s refreshing to find evidence of a program that might actually work.
In 2012, Congress passed with bipartisan support the Jumpstart Our Business Startups Act (JOBS Act) to help address a drought in the number of companies staging IPOs. According to a 2011 analysis by the IPO Task Force, which helped prompt this legislation, the number of companies going public – and small companies in particular – had plummeted dramatically.
Before 1999, an average of 547 companies held IPOs every year. But after 1999, that average dropped to just 192 offerings annually. The broken IPO market, the Task Force said, led to job losses estimated to be as high as 22 million.
Among the obstacles blamed for this phenomenon were the increasingly prohibitive costs of going and staying public. The Task Force found that companies spent an average of $2.5 million to comply with Securities and Exchange Commission (SEC) regulations before an IPO, followed by an average of $1.5 million a year in continuing compliance costs. Regulatory burdens were also held responsible for inhibiting the ability of companies to grow and get access to capital even as start-ups.
To ease these regulatory burdens, the JOBS Act sought to rebuild the “IPO on-ramp” by, among other things, creating a new category of “emerging growth companies” that would enjoy a more streamlined regulatory process in preparation for an IPO. The law also for the first time established a path for the “crowd funding” of start-ups.
While it’s still to early to tell if the JOBS Act will be enough to restore the IPO market to its pre-1999 days of glory, evidence shows it may be having a positive impact.
For example, a new analysis by S&P Capital IQ of the 246 companies that have gone public since September 2013, when the relevant portions of the JOBS Act were fully implemented, a full two-thirds were classifiable as “emerging growth companies.” Moreover, S&P found an 18 percent increase in the number of full-time workers employed by companies that went public under the auspices of the JOBS Act as “emerging growth companies.” Among the 42 companies with available data, the number of employees rose from 17,546 at the end of 2013 to 20,600 at the end of September.
According to the National Venture Capital Association, the number of venture-capital backed IPOs has also risen from 49 venture-backed IPOs in 2012 to 88 venture-backed IPOs so far in 2014 (although not all of these are IPOs of emerging growth companies). And according to Renaissance Capital, the amount of money raised by IPOs has grown from a recent of $21.8 billion in 2009 to $73.5 billion so far in 2014 (again, not all of this can be attributed to emerging growth company IPOs).
As promising as these numbers are, Congress shouldn’t rest on its laurels either. As the Kauffman Foundation has documented, America is currently undergoing a crisis in entrepreneurship, with the number of start-ups declining steadily over the last 30 years.
A logical follow-up to the JOBS Act would be the Startup Act 3.0, introduced in 2013 by a broad bipartisan group of Senators including Sens. Mark Warner, Jerry Moran, Chris Coons and Roy Blunt. Among other things, the legislation would create “Entrepreneur Visas” and “STEM Visas” so that highly-educated immigrants can stay in the United States instead of taking their skills elsewhere. As the Kauffman Foundation points out, 40 percent of Fortune 500 companies were founded either by immigrants or by the children of immigrants.
In the meantime, the JOBS Act stands as a great example of how bipartisan cooperation can still succeed to make government work more effectively to grow the economy.
Read the S&P Capital IQ analysis below: