Bring Back The IPO Market

The US economy is struggling and as someone interested in the technology sector, Silicon Valley has totally lost its mojo in my view.  I think these things are related – Sarbanes-Oxley Act 2002.

SarbOx was put in place to stop companies like Tyco, Enron and WorldCom from defrauding investors by overstating their numbers and cooking the books.  SarbOx also put some tough regulations in place for the traditional audit firms who were also very culpable in the disasterous frauds of the early 2000’s.  The audit firms were “overlooking” some irregularities and were accepting their clients “interpretations” on strange items to curry favour so that they could continue to win lucrative professional services work on top of their audit work.  Basically, ethics were forgotten about by a few companies and their accountants.

Some of the biggest losers from this were pension funds.  That’s a sensitive topic and politicians never lose votes by protecting working people’s pensions.  As a result, a complete knee-jerk law came into place with SarbOx.  In fact, the US Supreme Court heard arguments back in early December about whether or not the law has created a body that is unconstitutional.  The law is a mess and it is by no means doing what it was intended to do.

Right now, the cost of complying with SarbOx is so high and onerous that most small to medium size companies just can’t be bothered.  The auditors are making their fees they lost in professional services back in cumbersome administrative audit paperwork.  The whole thing has made it all too hard for small growth companies to list.

Accounting firm Grant Thornton have released a report that talks about creating a “new” private equity market that is open to small caps and “qualified investors”.  The report says there’s no need to get rid of ANY of the current regulation by the SEC or SarbOx – in fact, they couch this premise in political expediency, “Let’s just get on with fixing the market”.  That’s a handy position for an audit/accounting firm, it keeps their lucrative audit market intact.

The GT report also seems to point the blame largely at online brokerages and day traders which is crazy.  The decline in IPOs has nothing to do with the growth in online trading.  The GT proposal would require people go back to using the telephone and meeting with brokers before they could invest in this class of stock – how odd that their suggestion to free up the IPO market for small cap companies, which are largely technology companies, has them eschewing the use of modern technology.  From memory, eTrade in 1996 along with Netscape were some of the companies that kicked off the massive increase in IPOs.

My feeling is that the GT report confuses several issues: the dotcom bust, the frauds at WorldCom, Tyco and Enron and the impact of SarbOx on IPOs.  GT implies that having “qualified” investors handle new small caps will ensure that proper research and diligence is carried out.  There is almost a muddying of the water here as though the dotcom bust and the big Frauds were related and simply a lack of proper research by untrained day traders was the reason so much money way lost.  Let’s clear that up: the dotcom bust was a bubble caused by speculation, often ramped up by the very same “qualified” investors that GT refers to, but there were really very few cases of fraud.  Conversely, qualified auditors were signing off the statements of Enron and Tyco saying they were legitimate and within the bounds of the accounting guidelines.

SarbOx was created to deal with the frauds, not the dotcom bust.  It has put in place restrictions, hurdles and impediments that are preventing HONEST small and medium size companies from going to IPO.  The companies that were listing in the dotcom era, they weren’t lying to anyone – they would often say in the prospectus that they had no future profit projections.  They were however creating jobs, adding value and building things which is something America needs right now.  Repeal SarbOx, give the SEC some clout to deal with criminals who defraud shareholders (be they executives or auditors) and get Silicon Valley back in business.


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