Red tape said to strangle small-business IPOs

Devil seen in details
of SEC registration

By Sarah O’Brien

Securities regulators are standing in the way of the next Microsoft or Home Depot and the investors who might want to back them.

At least that’s what critics charged at a recent congressional hearing on the ability of small businesses to raise money in the capital markets.

The hearing, held June 26 by the House Financial Services subcommittee on oversight and investigations, was the first of several likely to be conducted on whether the Securities and Exchange Commission helps or hinders small companies in their quest for investors’ money.

“Small businesses are overwhelmed by how cumbersome the [registration] process is,” says Joan Sweeney, chief operating officer of Allied Capital Corp., a private-equity investment firm in Washington.

“It’s a system that is 70 years out of date and doesn’t need to be as difficult as it is,” says Ms. Sweeney, one of four witnesses who testified at the hearing.

frustrated

The hearing comes in the midst of a lethargic market for initial public offerings.

In fact, just 47 IPOs occurred in the first half of the year, raising $26 billion. Last year, companies raised $65.4 billion through 396 IPOs, and in 1999, companies raised $65.8 billion with 512 IPOs, according to Dealogic CommScan, a New York-based research firm.

But as one hearing witness pointed out, when the economy picks up, many small businesses will again seek capital — and investors will be waiting to help them gain footing in the stock market.

Critics say that unless the SEC makes registration easier for small businesses, some with the potential to be among the country’s next great companies will end up falling by the wayside, translating into a loss of jobs and economic activity.

Part of the reason that small businesses are frustrated is that the SEC, in an effort to battle micro-cap stock fraud, in 1998 tightened the rules on small-business securities offerings — requiring additional disclosure reports and more-frequent reporting.

The result, say critics, is an SEC that spends more time policing the registration process than helping small businesses understand it.

Ms. Sweeney, who worked in the agency’s division of enforcement in the late 1980s, says the agency spends so much time poring over registration material and asking for minor changes that staffers have little time left to help registrants with the process.

Additionally, not long after the SEC tightened its rules, the Nasdaq Stock Market raised its minimum revenue and capitalization requirements for companies listed on the over-the-counter bulletin board.

Donald Devine, a professor at Bellevue University in Nebraska who testified at the hearing, said the regulatory crackdown ended up eroding investor access to corporate America’s potential next stars.

He questioned whether companies such as Microsoft Corp. or Home Depot Inc. would have been successful under the SEC’s stricter rules and the Nasdaq’s new minimums.

Critics also say the SEC is ignoring a congressional mandate handed down several years ago that is supposed to help facilitate capital formation.

Onerous costs

In 1996, Congress passed the National Securities Markets Improvement Act. It required the SEC, in its rulemaking, to consider “competition, efficiency and capital formation” in addition to investor protection.

Subcommittee members appeared to be sympathetic to the problem.

In her opening statement, the panel’s chairwoman, Rep. Sue Kelley, R-N.Y., said: “I am greatly distressed by concerns that fundamental regulatory obstacles are inhibiting the flow of capital to, and investor participation in, the small- and middle-market business sector.”

Others pointed to the crucial role that small businesses play in the country’s economy.

Indeed, according to the Small Business Administration, companies with fewer than 500 employees created 11.8 million net new jobs from 1992 through 1996. In comparison, companies with more than 500 employees lost 645,000 jobs in the same time period.

Between now and 2005, small businesses are expected to create 60% of the new jobs in the United States.

Small businesses also produce more than half the country’s gross domestic product and employ more than half the country’s work force.