Dan Primack

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Congress works to fix imaginary IPO crisis

January 5, 2012: 5:00 AM ET

A new bill aims to make it easier for more companies to go public. But what if they don't need to?

Senators Chuck Schumer (left) and Pat Toomey (right)

Senators Chuck Schumer (left) and Pat Toomey (right)

FORTUNE -- Congress has proved itself incapable of finding bipartisan solutions to our nation's most acute problems. But when it comes to imaginary crises, it's doing a bang-up job.

Last month Senators Chuck Schumer (D-N.Y.) and Pat Toomey (R-Pa.) introduced new legislation called the Reopening American Capital Markets to Emerging Growth Companies Act. The goal: increase the number of small and midsize companies listed on U.S. public markets through the temporary elimination of regulations like allowing shareholders to vote on golden-parachute arrangements for senior company executives.

We've heard this argument before. After the financial crisis, lawmakers were in a panic that U.S. companies would flee to less regulated markets abroad. This time around, the argument goes, more listings will translate into more jobs.

"Reopening" American capital markets to emerging growth companies, of course, presumes that such markets are closed. And were that the case, we should all be pumping pompoms behind Schumer and Toomey. The reality, however, is very different. Through the middle of December, 52 companies backed by venture capital had raised $9.88 billion in 2011 via initial public offerings -- names like LinkedIn (LNKD), Zynga (ZNGA), Fusion-io (FIO), and Zipcar (ZIP). A larger amount of money has been raised in only five other years since 1980. Does that sound like a job-killing drought? Yes, the actual number of VC-backed IPOs is down from most prior years, but why do Schumer and Toomey expect a plethora of small-cap public companies to foster greater employment than a lesser number of richer companies? Wouldn't it actually be the other way around?

It's not as if the smaller issuers no longer exist. Exactly half of this year's VC-backed IPOs raised less than $100 million, and plenty of those companies are generating under $50 million in annual revenue. For example, look at Pacira Pharmaceuticals (PCRX), a New Jersey-based drug company focused on pain management. It was founded in 2007, raised $42 million in a March IPO, and reports just $11.4 million in revenue for the first three quarters of 2011.

And profitability certainly isn't a barrier to going public -- witness Groupon (GRPN) and Pandora Media (P), which last year raised $700 million and $235 million, respectively, without a dollar in profit.

Why are Congressmen spending valuable time on a quixotic pursuit? Because venture capitalists have asked them to, and VCs are known to be very generous tippers (er, campaign contributors).

The 10-year-return benchmark for venture capital is barely above breakeven (1.25%), according to Cambridge Associates. That means many VCs have lost money for their investors and are having difficulties raising new funds. What these zombies need are more liquidity events, and what better way to get them than by making it easier for their companies to go public? Not through a government-financed bailout, of course, but through a sort of government-aided mulligan of sorts. Never mind that shareholder protections would get watered down; IPOs are apparently a volume business.

Going public is not supposed to be a cakewalk. We've already been through an IPO environment where all you needed was a clever URL and a fuzzy mascot, and the results weren't pretty. I'm not suggesting that last year's issuers are all future members of the Fortune 500, but shouldn't a successful listing signal to retail investors that experienced institutions took a hard look at the issuer and considered it worthy of consideration? How can that still be true if those institutions get to see only two years of audited financial statements instead of three? Or if analysts working for a company's underwriting bank can publish pre-IPO research (albeit with a disclaimer)?

Schumer and Toomey's hearts are in the right place, since this legislation is aimed at helping more Americans find work. But their heads are all wrapped up in a problem that doesn't exist.

This article is from the January 16, 2012 issue of Fortune.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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