Regulatory Changes, Private Equity Markets, and the Decline of IPOs
Twenty-six percent of firms first financed in 1994, before a 1996 law that boosted private equity markets, went public through an IPO. Of those first financed in 2000, only 2 to 3 percent did.
The National Securities Markets Improvement Act (NSMIA), passed in 1996, has facilitated startups’ access to out-of-state private capital by exempting eligible private issuers from complying with the different state securities regulations — known as blue sky laws — in the various states in which their investors are located. By amending the Investment Company Act of 1940 registration requirements, the new law has also made it easier for private funds investing in startups to raise large amounts of capital. Prior to NSMIA, venture capital (VC) and private equity (PE) funds could raise capital from no more than 100 investors if they wanted to avoid having to register as public investment companies and be regulated like mutual funds. NSMIA has made it possible for such funds to raise capital from an unlimited number of investors and still avoid registration if all their investors are “qualified purchasers” — individuals owning at least $5 million in investments or institutions owning at least $25 million.
Winning the H-1B Visa Lottery Boosts the Fortunes of Startups
In The Deregulation of the Private Equity Markets and the Decline in IPOs (NBER Working Paper 26317), Michael Ewens and Joan Farre-Mensa suggest that NSMIA-induced changes in regulation have played a significant role in changing the going-public versus staying-private trade-off, helping bring about a new equilibrium in which fewer startups go public and those that do go public are older. Their sample includes all US-based startups listed in the VentureSource venture capital database that raised their first round of private funding between 1992 and 2016. Although VC-backed firms make up less than 1 percent of all privately held firms in the United States, from 1990 to 2016 they accounted for an estimated 42 percent of all US IPOs.
— Linda Gorman
The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.