There's a saying that hard cases make bad law. Experience teaches that we need to revise that saying into something like: Newsworthy corporate developments cause Congress to make bad securities laws. The dot-com bubble collapse lead to Sarbanes-Oxley, which aptly has been called quack corporate governance. The financial crisis of 2008 led to Dodd-Frank, which has aptly been called (by yours truly) quack corporate governance round 2.
A bipartisan group of lawmakers called on regulators to overhaul the way initial public offerings are conducted, concerned that last month's flubbed stock sale by Facebook shows the current system unfairly punishes small investors. ...
The lawmakers said fundamental changes are needed, even if that means rewriting parts of the landmark Securities Act of 1933, which created the SEC and the existing regulatory framework for overseeing IPOs.
The Facebook deal "taught us that, at a minimum, the IPO process suffers substantial flaws," Mr. Issa wrote in the 15-page letter on behalf of the House committee. The 79-year-old federal law is "fraught with conflicts of interest and incentives to misprice shares."
The US IPO market is in the tank. As I observe in my article, Corporate Governance and U.S. Capital Market Competitiveness:
In the 1990s, the number of foreign issuers listed on the NYSE roughly quadrupled, with NASDAQ experiencing similar growth, while London and the other major European exchanges were losing market share. Since 2000, however, the situation appears to have reversed. Using global IPOs as an indicator of the relative competitiveness of capital markets, for example, there was a dramatic decline in the U.S.’ market share 48% to 8% between 2000 and 2006.
Although the Paulson Committee reported slight improvement in 2008 and 2009, by the first quarter of 2010 the Committee was again reporting continued “deterioration in the competitiveness of U.S. public equity markets.” As a result, by nearly all measures, the U.S. capital market today remains “much less competitive than it was historically.”
Why did that happen? Back to my article:
There is little evidence that poor corporate governance practices contributed to either the economic turmoil of the last decade in general or the declining competitiveness of U.S. capital markets. ... As far as the economic crisis following the bursting of the housing bubble, “[a] striking aspect of the stock market meltdown of 2008 is that it occurred despite the strengthening of U.S. corporate governance over the past few decades and a reorientation toward the promotion of shareholder value.” A recent report commissioned by the New York Stock Exchange reached the same conclusion, finding that “the current corporate governance system generally works well.”
If corporate governance was not the problem, what did drive the decline in U.S. capital market competitiveness? According to the Paulson Commission, “one important factor contributing to this trend is the growth of U.S. regulatory compliance costs and liability risks compared other developed and respected market centers.” This essay therefore focuses on two questions: First, has the risk of anti-fraud liability affected the competitiveness of U.S. capital markets? Second, did the federalization of key aspects of corporate governance during the last decade generate net regulatory costs adversely affecting those markets?
In short, the answer to both of those question is Yes.
In the article, I demonstrated that the costs created by SOX and Dodd-Frank have substantially distorted corporate financing decisions:
On the one hand, SOX discouraged privately held corporations from going public. Start-up companies opted for “financing from private-equity firms,” rather than using an IPO to raise money from the capital markets. Because “going public is an important venture capital exit strategy, partially closing the exit could impede start-up financing, and therefore make it harder to get ideas off the ground.” In addition to the decline in domestic IPOs, there was a decrease in new foreign listings on U.S. secondary markets. The net effect was the declining market share of U.S. markets in such transactions as global IPOs. “Martin Graham, director of the London Stock Exchange’s (LSE’s) market services, said that Sarbanes-Oxley has ‘undoubtedly assisted our efforts’ and emphasized the LSE’s ability to draw new listings from foreign companies.”
Conversely, there has been a trend towards public companies exiting the public capital markets. A Foley & Lardner survey, for example, found that after SOX some 21 percent of responding publicly held corporations were considering going private. A study by William Carney of 114 companies going private in 2004 found that 44 specifically cited SOX compliance costs as one of the reasons they were doing so.
In the paper, I demonstrate that there are three major reasons why federal intervention in corporate governance tends to be ill conceived. First, federal securities laws tend to be enacted in a climate of political pressure that does not facilitate careful analysis of costs and benefits. Second, federal securities laws tend to be driven by populist anti-corporate emotions. Finally, the content of federal securities laws is often derived from prepackaged proposals advocated by policy entrepreneurs skeptical of corporations and markets.
In sum, the downturn in the US IPO market can be traced in large part to Congressional "reforms" of the last decade.
There is no reason--nada, zilch, none--to think laws enacted in response to the Facebook IPO would be any different. Instead, they likely will just add new burdens and costs to an already over-regulated market that is dying on the vine as it is nibbled to death by regulatory ducks.
