PrefBlog

The recently appointed SEC Commissioner Robert J. Jackson Jr. (a Trump appointee), had some interesting things to say about The Middle-Market IPO Tax:

A lot has changed since 1999: I was humbled by the dot-com crash, advised the Treasury during the financial crisis, and became a law professor. And in the two decades since I left Wall Street, our markets have been transformed by technology. Today stocks trade with dizzying speed and our markets move faster than ever.

But some things have remained the same. You see, when I was a banker, we charged a standard fee for a middle-market IPO: seven percent. We would negotiate a reduced price for large, high-profile companies, where the client’s bargaining power produced a better deal. But for middle-market companies, our fee was always seven percent. Whatever industry the company was in, whatever its growth profile, however qualified its management team was, if they were a smaller firm, they always paid seven percent.[4]

Back in 1999, I assumed that technology and competition would eventually lead bankers to give middle-market companies better pricing on IPOs. That’s why, when I arrived at the SEC, I asked my team to dig into the data to see how middle-market IPO pricing has changed. We’ll get into what we found in a moment. But the short version is that nothing has changed: middle-market entrepreneurs still have to pay 7% of what they’ve created to access our public markets.
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As the figure below shows, from 2001 through 2016, we found that over 96% of midsized IPOs featured a spread of exactly 7%:[14]
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From 1975 to 1991, one out of two U.S. public companies were worth less than $100 million in inflation-adjusted dollars. But public companies of that size are vanishing: today that fraction is less than one in four.[20]
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Today, private markets provide a much more competitive alternative. Those markets are larger and more robust than ever—and can support a company’s growth well into the later stages of its life.[22] In short, when public markets were the only game in town, companies were more willing to pay the IPO tax. Today, that tax can lead many middle-market companies to choose to stay private—with significant implications for the broader economy.
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But for two reasons I think the middle-market IPO tax poses real risks for our economic future. First, it’s bad for smaller companies because it puts them at a significant disadvantage. Without a realistic alternative to private capital, middle-market firms can be forced to accept less favorable terms when raising money. If we reduce the 7% middle-market IPO tax, private capital providers will face increased competition from public markets—improving financing terms for middle-market businesses.

Second, the middle-market IPO tax is bad for ordinary investors. When the tax causes our most exciting young companies to raise private capital rather than go public, retail investors are left out of a significant part of the Nation’s economic growth.

Click for Big

PerpetualDiscounts now yield 5.43%, equivalent to 7.06% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, a slight (and perhaps spurious) narrowing from the 310bp reported April 18.

This entry was posted on Wednesday, April 25th, 2018 at 9:11 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.