The death of the venture backed IPO market was the chief topic of concern at the NVCA’s annual meeting in Boston last week. As soon as the event kicked off the NVCA sent out a press release with a four pillar plan to rescued venture backed IPOs.
Trevor Loy, a NVCA board member called the lack of IPOs an “absolute crisis,” when we sat down to talk with him. Loy, who’s also a managing partner at Flywheel Ventures, identified four reasons for the dearth of IPO’s, as well as a few ways to revive the market, which he discusses in the accompanying video.
The four reasons for the IPO freeze:
1. Unintended effects of Sarbanes-Oxley: Loy says it costs $3-5 million annually to hire all the accountants and lawyers necessary to be SOX compliant. For a small company that needs to turn public, that blows out their profit.
2. The “Spitzer Ruling” that split analyst research and underwriting: It reduced equity research in general. You’re not going to pull an analyst off GE to research a new smaller company that’s coming public. Without analyst research, though, bigger investors like Fidelity can’t buy the stock.
3. There’s more money in proprietary trading for banks: As a result big banks are less interested in taking a company public, there’s less in it for them. Oddly though, venture backed companies are still biased against boutique investment firms, and would prefer the bigger banks take them publiv.
4. Move to decimalization in the stock market: Says Loy, We reduced spread from 12.5 cents to 1 penny, so firm need to trade higher volumes, which means bigger companies with bigger liquidity flows are traded.
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