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President Trump and the case of the missing US IPO market

In the last 20 years, the U.S. stock market has undergone an alarming change that too few people are aware of.

Between 1996 and 2016, the number of listed companies fell by half, from 7,322 to 3,671, according to data from Credit Suisse. This occurred despite the U.S. economy growing nearly 60 percent over the same period. What's even more flummoxing is that the United States seems to be the only developed country that lost so many stocks. Most other countries actually gained around 50 percent.

So why is this happening? We can point to a number of culprits.

For one, merger-and-acquisition activity has strengthened in recent years, and when M&A takes place, a company is consequentially delisted (if it was listed before the deal). The same thing happens, of course, when a company goes out of business.

Another reason could be the growth of private capital, which allows companies to raise funds without having to go public. Between 2013 and 2015, the amount of private money invested in tech start-ups alone tripled from $26 billion to $75 billion, according to consulting firm McKinsey. As a result, more and more software firms are managing to reach $10 billion in value before their initial public offering. Think Dropbox, Airbnb, Pinterest, Uber — all of which, for now, have avoided selling shares to public market investors.

My belief is that, out of all the reasons for fewer U.S. stocks and IPOs, the most impactful has been the surge in federal regulations over the last two decades. Rising costs associated with being listed on an exchange and meeting compliance standards have prohibited IPOs for all but the largest U.S. firms.

"My belief is that, out of all the reasons for fewer U.S. stocks and IPOs, the most impactful has been the surge in federal regulations over the last two decades."

This partly explains why more and more companies are delaying going public. Apple's 1980 IPO came a mere four years after Steve Jobs, Steve Wozniak and Ronald Wayne founded the future iPhone-maker in Jobs' garage. Today that number has risen dramatically. It's now estimated that the average age of a tech firm at the time of IPO is 11 years.

Some might disagree that regulations have had much of an effect on the U.S. equity market. In a recent article, The New York Times' "Deal Professor," Steven Solomon, writes there's very little evidence that red tape has contributed to the dearth in IPOs. On the contrary, I believe the evidence is incontestable.

The Incredibly Shrinking Universe of Stocks

U.S. stock market
1976
1996
2016
Number of listed companies 4,796 7,322 3,671
Market cap (billions 2016 USD) 2,975 12,322 25,303
Avg. market cap (millions 2016 USD) 620 1,683 6,893
Avg. age in years of a listed company 10.9 12.2 18.4
Individual direct ownership (%) 50 27.2 21.5
Credit Suisse (Authors: Michael Mauboussin, Dan Callahan, Darius Majd)

Consider the Sarbanes-Oxley Act (SOX), signed by President George W. Bush in 2002. Its goal, to prevent massive corporate fraud such as we saw from Enron and WorldCom, is an admirable one. But SOX has had several unintended consequences. Because the requisite internal control procedures are so costly and cumbersome — necessitating additional compliance and accounting positions, not to mention hundreds of hours in compliance-driven tasks — smaller firms are inevitably at a disadvantage.

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As a result, many small to mid-sized companies are delaying going public, or avoiding it altogether, to escape the regulatory burden.

Before SOX, there were an average 528 IPOs a year. Since it was enacted, that number has fallen to 135, a decline of nearly 75 percent, according to Dealogic data. Last year only 111 IPOs made it to market, a far cry from the 779 that took place in pre-SOX 1996.

The US IPO Market Year-to-Date

IPO stats
Number
% change (+)
Deals priced 66 73.7
Deal proceeds ($B) 17.5 200.5
Deals filed 82 54.7
Renaissance Capital (06/19/2017)

Other legislation has deterred even more companies from pursuing an IPO, including the Dodd-Frank Wall Street Reform Act. It's little wonder that, in a 2016 survey conducted by the National Federation of Independent Business, small-business owners said "unreasonable government regulations" were their second-highest concern, following "cost of health insurance." More than 33 percent said regulations were a "critical" problem.

But there's hope. President Donald Trump has pledged to roll back many of the rules that have created friction for smaller companies seeking to expand. In December, the month after the election, the NFIB's Small Business Optimism Index soared to 105.8, up from 98.4 in November, a 12-year high. Since then, the index has held a similar level, indicating that despite recent setbacks, Trump's pro-growth agenda continues to excite small-business owners.

Only time will tell if Trump can succeed, but I remain optimistic his business-friendly policies can reverse the deleterious effects of the past 20 years.

By Frank Holmes, CEO and chief investment officer of U.S. Global Investors and a member of the CNBC-YPO Chief Executive Network

About YPO

CNBC and YPO have formed an exclusive editorial partnership consisting of regional "Chief Executive Networks" in the Americas, EMEA and Asia-Pacific. These Chief Executive Networks are made up of a sample of YPO's global network of 24,000 top executives from 120 countries who are on the front lines of the economy and run companies that collectively generate $6 trillion in annual revenue.