NYSE sounds warning about regulations choking off U.S. IPOs

Regulations have made it more difficult to raise capital through stock sales, choking off access to vital capital for fledgling companies, the New York Stock Exchange’s chief told members of Congress.

At a hearing to discuss the Sarbanes-Oxley Act and corporate governance generally, NYSE Group President Tom Farley argued compliance with the 2002 law, passed in the wake of the Enron and WorldCom accounting scandals to ensure corporations give truthful accounts of their finances, is too difficult for many smaller companies. The danger, he said in his prepared remarks, is this creates a barrier to startups, preventing them from raising money through initial public offerings that could fuel their growth.

“The regulatory environment for public companies over the past 15 years has grown increasingly difficult to navigate,” Farley said in the prepared remarks Tuesday. “Compliance with certain provisions of SOX today sets considerably higher barriers — not just financially for public companies — but also for entry into public markets for private companies, particularly for small and midsize private companies,” he added, referring to Sarbanes-Oxley as SOX.

For years, critics have argued the U.S. is an increasingly unfriendly environment for IPOs. President Donald Trump, who has pledged to eliminate regulations, hired a Securities and Exchange Commission chairman — Jay Clayton — who helped companies including Alibaba Group Holding raise money. This suggests complaints from NYSE and its biggest listing rival Nasdaq Inc. may have a receptive audience in Washington. Farley met with Trump in April, and afterward praised the president’s “business-friendly” stance.

Clayton, in a speech last week, said that “the reduction in the number of U.S.-listed public companies is a serious issue.” When companies avoid listing publicly traded shares, “the vast majority of Main Street investors will be unable to participate in their growth. The potential lasting effects of such an outcome to the economy and society are, in two words, not good.” He noted, however, that public markets should be made more attractive “without adversely affecting the availability of capital from our private markets.” It was his first in-depth comments since becoming SEC chairman.

Giant startups like Uber can remain private in part because of the abundance of venture-capital funding, while others view a takeover, not an IPO, as their exit strategy. Either way, avoiding public markets hurts NYSE and Nasdaq because their exchanges collect fees from the companies they list and collect money from trading.

“By choosing to remain private and not access the public markets for capital and liquidity, a company may severely limit its opportunity for economic growth, hiring, and wealth creation, and the American public is deprived of investment choice,” Farley said.

The NYSE is currently fighting to win at least a piece of the largest IPO in history, Saudi Arabian Oil Co., or Saudi Aramco.

Earlier this year, Nasdaq Chief Executive Officer Adena Friedman gave a similar warning. “If the volume of IPOs continues to fall and more companies choose to stay or go private, job creation and economic growth could suffer, and income inequality could worsen as average investors become increasingly shut out of the most attractive offerings,” she wrote in a Nasdaq whitepaper.

Ernst & Young has argued this is much ado about nothing. “More than half of the decline in the number of public companies since 1996 can be attributed to the post-dot-com bubble era of business failures and delistings that immediately followed an extraordinary number of IPOs,” according to a May report from the company. “In more recent years, we find that a surge in private capital and the unique characteristics of many of today’s new companies have made it easier to grow outside the public equity market for longer than historically was feasible.”

EY added: “If policymakers’ objective is to generate capital formation, economic growth and job creation, it may be less important whether capital formation occurs in public or private capital markets.”

Farley’s critique didn’t stop with Sarbanes-Oxley. SEC rules force public companies to “disclose exposure to material risks regarding known trends, events and uncertainties that are reasonably likely to have material effects on the company’s business, financial position or results of operations,” including areas commonly known as “environmental, social, governance” issues like greenhouse-gas emissions.

“The length and complexity of these disclosures continue to increase, while the readability of these documents is at an all-time low,” Farley said.