The "Disappearing" US Public Company

Ronald Woessner  |


US public companies are disappearing! This trend is 100% opposite the trend in other developed countries with similar institutions and economic development.

Many private companies avoid going public, preferring instead to "exit" their investment by selling the company, or hold off going public as long as they can.

This trend is causing US public companies to disappear. For example, US public company listings decreased over the last two decades by about 46%, from 8,090 in 1996 to 4,331 in 2016, according to a 2018 academic study from the Harvard Kennedy School.[1]

Conversely, public company listings increased by about 48% in other developed countries over a comparable period, according to another academic study in 2015. According to that study, the US "should have had" approximately 9,500 public companies in 2012, resulting in an estimated "listing gap" of approximately 5,400 companies as of 2012. The listing gap is undoubtedly higher today.

This disappearing public company trend has profoundly negative consequences for US job growth. A March 2011 report from the Department of the Treasury's “IPO Task Force” determined that 92% of the job growth among companies who had gone public occurred after the company's IPO.

Another negative consequence of the disappearing public company is that as public companies disappear, there are fewer public companies for mutual funds (Vanguard, Fidelity, etc.), pension funds, and the like to invest in. If current trends continue, the "S&P 500" will become the "S&P 250."

Moreover, not only does staying private thwart US job growth, it deprives mom-and-pop "Main Street" investors of opportunities to invest at the early stage of a business and reap significant gains in value during the business' early, private years.

To wit, Uber and AirBnB are two well-known companies that have not yet gone public and whose investors (principally Silicon Valley and Wall Street investment firms and high-net worth individuals) are poised to make HUGE sums of money on their investments. In this regard, note the recent news reports that Uber's proposed IPO market valuation is $120 BILLION. "Main Street" investors will made ZERO from the success of these (and similar) venture capital funded companies because these investment opportunities and similar ones are not made available to them. This statement is not a criticism of the investors who stand to make an enormous amount of money (after all they took a risk with their money and are entitled to a return) – it is simply a statement of fact.

As a counterweight to this trend of income being redistributed to Silicon Valley and Wall Street investment firms and high-net worth individuals, SEC Chairman Jay Clayton wants to let more "Main Street" investors participate in private deals. Within recent months he was quoted in The Wall Street Journal as saying:

We thank Chairman Clayton for recognizing the need for SEC policies that permit more Main Street investors to invest in private deals. But -- permitting more Main Street investors to invest in private deals does NOT fix the problem of the declining number of US public companies.

So, what is behind the precipitous fall in the numbers of US public companies over the past decades? The following factors have played a significant role in this alarming trend:

Despite the foregoing, smaller-cap companies can thrive in the public markets. If you are a CEO or CFO of a smaller-cap company with an illiquid stock and your company is struggling to raise non-toxic capital => don't despair! A subsequent article will provide you specific, actionable recommendations for increasing your company's stock liquidity.

Subsequent articles will also unveil a policy solution that, if implemented, will reverse the trend of The "Disappearing" US Public Company!

© Ronald A. Woessner

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December 12, 2018

Mr. Woessner mentors, advises, and raises capital for companies in the start-up and smaller-cap company ecosphere. He also advocates for policies to help smaller-cap companies access capital and for policies that create a more hospitable public company environment for them. For more information on Mr. Woessner's background see https://www.linkedin.com/in/ronald-woessner-esq-3645041a/.

[1] "Hunting High and Low: The Decline of the Small IPO and What to Do About It," M. Lux and J. Pead, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/working.papers/86_final.pdf.

[2] According to a 2018 SEC study of thinly-traded securities, 3,500 of 8,700 NMS-traded securities had a dismal, median average daily volume of < 50,000 shares per day.The trading volumes of OTC-traded stocks are even more dismal. A subsequent article will provide more detail regarding these dismal trading volumes.

[3] Lack of trading liquidity makes it virtually impossible for investment firms initially to invest through the open market without affecting the stock price – similarly, lack of liquidity makes it virtually impossible for them to exit an investment position through the open market. See an earlier article here that addresses this topic in more detail.

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