Financial Restructuring to Sustain Recovery

Reenergizing the IPO Market

 Reenergizing the IPO Market 4 From 1980 to 2000, an annual average of 310 operating companies went public in the United States. During 2001–12, on average, only 99 operating companies went public.1 This decline occurred in spite of the doubling of real gross domestic product (GDP) during this thirty-three-year period. The decline was even more severe for small-company initial public offerings (IPOs), Some of the content of this article overlaps with my testimony before the U.S. Senate Banking Committee on March 6, 2012 (Ritter 2012). The analysis of this paper draws heavily on my joint work with Xiaohui Gao and Zhongyan Zhu (Gao, Ritter, and Zhu 2014), Martin Kenney and Don Patton (Kenney, Patton, and Ritter 2012), and Stefano Paleari, Andrea Signori, and Silvio Vismara (Vismara, Paleari, and Ritter 2012 and Ritter, Signori, and Vismara 2013). I wish to thank Leming Lin for research assistance. For comments on an earlier draft, I wish to thank Barry Silbert, Harry DeAngelo, François Degeorge, David Weild, and participants at the Kauffman Foundation Summer Legal Institute on July 23–25, 2012; the Brookings, Nomura, Wharton conference on Reconstructing and Revitalizing Japan’s Financial Sector on October 26, 2012; the Kellogg School conference on Security Market Auctions and IPOs on November 2–3, 2012; and the Brookings Institution conference on Promoting Innovative Growth on December 3, 2012. 1. “Operating-company” initial public offerings (IPOs) exclude closed-end funds, real estate investment trusts (REITs), special-purpose acquisition companies and other blind-pool offers, oil and gas limited partnerships, American Depositary Receipts (ADRs), unit offerings, penny stocks (IPOs with an offer price below $5 per share), small best efforts offers, bank and savings and loan IPOs (most of which are conversions of mutual into stock companies), and stocks not listed on Nasdaq or the American or New York Stock Exchanges. Table 15 of “Initial Public Offerings: Updated Statistics” on my website (http://bear.warrington.ufl.edu/ritter) gives the year-by-year number of IPOs excluded for each of these reasons. jay r. ritter 04 2524-4 ch4.indd 123 10/21/13 8:53 PM Source: Reproduced from Gao, Ritter, and Zhu (2014). a. Small firms are defined as having pre-IPO annual sales of less than $50 million (2009 purchasing power) and big firms as having pre-IPO sales of more than $50 million (2009 purchasing power). Figure 4-1. Number of IPOs in the United States, by Size of Firm, 1980–2012a Number of IPOs 1 9 8 0 50 100 150 200 250 300 350 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 Small firms Big firms 04 2524-4 ch4.indd 124 10/21/13 8:53 PM reenergizing the ipo market  for which the average volume dropped 83 percent, from 165 IPOs a year during 1980–2000 to only 28 a year during 2001–12. Figure 4-1 illustrates the pattern on a year-by-year basis for both small and big companies. Small and big companies are defined on the basis of inflation-adjusted (2009 dollars) annual sales in the twelve months prior to going public, using a cutoff of $50 million to define small and big. Many commentators have been alarmed at this prolonged drop in smallcompany IPOs, since it is the conventional wisdom that companies going public create many jobs. The Wall Street Journal editorial page has bought into this argument , as has Congress, culminating in the April 2012 passage of the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act is intended to encourage the funding of small businesses, primarily by easing various securities regulations. The JOBS Act, among other things, encourages crowdfunding; eliminates restrictions on general solicitation...