When Walmart made plans to go public in 1970, it filed a prospectus with the Securities and Exchange Commission (SEC) that was 28 pages long and succinctly informed investors of the company’s operations and goals. Ten years later, Apple filed its prospectus which weighed in at a lean 47 pages.
Walmart, of course, went on to become the world’s largest retailer and Apple one of the most innovative companies in American history. Equally important, retail investors that bought Walmart or Apple stock have earned enormous returns in the decades since these companies went public.
Contrast this with Broadmark Realty, a small real estate investment trust where I serve as chairman and which recently listed on the New York Stock Exchange. In order to complete the deal that led to Broadmark becoming public, we had to file nearly 700 pages of proxy materials with the SEC, and expend a tremendous amount of internal resources to check every complex legal, financial and compliance box that is now required to enter the public markets.
While going public was undoubtedly the right decision for Broadmark and our shareholders, I can sympathize with the increasing number of entrepreneurs choosing to keep their companies private or sell to larger competitors. The increasing burdens involved with the initial public offering (IPO) process are a symptom of a broken public company model in the United States.
The trend is alarming: The number of public companies in the United States has declined by half over the last two decades, and the IPO market is a fraction of what it was in the 1980s and 1990s. The tragedy of this decline is that public listings drive economic growth and are the businesses that create jobs at scale. Studies have found that over 90 percent of job creation occurs after a company goes public, while venture-backed businesses account for about one-fifth of overall economic output in the United States. The math is simple: fewer IPOs means less long-term job creation and economic growth.
The decline is also bad news for the Main Street investors. Companies like Walmart, Apple, Microsoft, Amazon and Cisco all went public early in their lifecycle, generating big returns for early investors. When companies choose to stay private, investment returns are typically reserved for institutional investors or wealthy individuals. The teachers, nurses, cops and firefighters that depend on vibrant public markets to save for retirement or send a child to college all lose out.
I support robust investor protections when it comes to IPOs, but the pendulum has swung too far. While the SEC has taken several recent steps to help more companies go public, there is much more that needs to be done.
For starters, certain financial reporting mandates that make sense for large companies should be tailored so that costs are scalable for small issuers. Despite having audited financial statements from the start, Broadmark had to hire a second major national firm due to a byzantine system of financial reporting rules. The SEC’s pending proposal to exempt low-revenue companies from Section 404(b) of the 2002 Sarbanes-Oxley Act is a good start and should be finalized.
The SEC’s efforts to scale disclosure mandates for small companies is also positive. Since 2000, the average length of annual reports has increased by 30 percent, while the 2011 IPO Task Force report found that 92 percent of CEOs believe the “administrative burden of public reporting” was a major barrier to going public. Once again, these costs fall disproportionately on small issuers and their shareholders.
The SEC and Congress must also address problems stemming from the implementation of the 2012 Jumpstart our Business Startups (JOBS) Act. For example, startup businesses that use general solicitation under the JOBS Act to raise capital should be allowed to rely on self-certification by investors that they are “accredited” under SEC rules. This would increase the flow of capital into young companies and create a more robust IPO pipeline down the road.
To be sure, providing robust protections for investors must always be a top consideration for policymakers. But as the JOBS Act demonstrated, regulations can be modernized without compromising long-standing investor protections
If we don’t take steps to encourage more businesses to go public, economic growth and job creation will suffer, and retail investors that rely on strong public markets will be further left behind. The time to act is now to revive the public company model and ensure that our economy and investors do not miss out on the next generation of great American businesses.
Joseph L. Schocken is chairman of Broadmark Realty and served as president of Broadmark Capital LLC, a company he founded in 1987 and where most recently he oversaw the company’s merchant banking and real estate lending activities.
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