IPOs: don't blame Sarbox

Extraordinary that the debate about the impact of Sarbanes Oxley on IPOs still continues almost seven years after it was introduced. Particularly in this economic climate.

Last week, The Wall Street Journal was raising concerns about the Obama administration's plans to regulate venture capital firms, pointing out that Sarbanes Oxley's compliance costs had stopped start ups from going public. That's notwithstanding the fact that the IPO market is close to moribund at the moment thanks to the economic crisis.

Writing in the New York Times Dealbook, Steven M Davidoff says the IPO market is in trouble for reasons that go beyond the financial crisis. Simply put, it's the market's architecture where you have many more alternative sources of finance. Debt can be sold in the private market, there's private equity and retail investors hold less than 30% of publicly traded shares with the remainder held through mutual funds, hedge funds and other institutional investors. Which, as Davidoff implies, makes the arguments about Sarbanes-Oxley moot.

"In this light, regulators not only need to think about who they regulate and where they regulate, but they need to rethink the way they regulate the traditional equity market," Davidoff writes. "If the equity market is no longer the primary vehicle for capital raising, what is public equity good for? If it is indeed primarily to facilitate sales and exits, then perhaps this is where the focus of regulation should be. And of course, if the I.P.O. market is moribund, it behooves us to find out why. I have always suspected that the cause is not the Sarbanes-Oxley Act and recent regulation, but secular trends for alternative financing."

At the same time, the US continues to attract foreign listings despite Sarbanes-Oxley with, for example, Chinese video games maker Changyou.com making its debut on the Nasdaq and Israeli tech company N-trig, which makes pen and touch devices for notebook computers saying it plans to list on the Nasdaq next year.

Again, the concerns about Sarbanes Oxley seem irrelevant in this market. As Reuters reports: "Fears about Sarbanes-Oxley, the corporate governance law many called onerous and said would drive IPOs away from U.S. exchanges, have also subsided, NYSE's head of listings Scott Cutler said recently. In this scandal-ridden environment, maybe more oversight is turning out to be another selling point."

No doubt the complaints will continue. But market trends suggest the picture is more complicated.


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