I mentioned two days ago the continued decrease of the volume IPOs of VC-backed companies. Discussing it with a VC friend, we sort of joked about the efficiency of the Sarbanes Oxley regulation that is essentially scaring away from the public markets a generation of companies – hence reducing in a round about way the potential for fraud and abuse from these new companies.
This morning, Benchmark Capital’s Bill Gurley is pointing to a Wall Street Journal piece (that I could not read b/c you need to be a subscriber) from the CEO of the Nasdaq market warning of the potential demise of US Markets due to Sarbanes Oxley:
He is properly concerned that the overly bureaucratic Sarbanes-Oxley (SOX) processes could lead to the end of global domination by the U.S. capital markets. Ironically, the two gentlemen that created SOX did it with the intention of “preserving” U.S. capital market leadership. Their fear was that people viewed our markets as too risky, and so they created SOX to ensure that investors would “trust” our markets.
It turns out that SOX is doing the opposite – it is ensuring the demise of the leadership of U.S. capital markets. New up and coming companies outside the U.S. are now shunning the U.S. markets in mass. Let us not forget that the Nasdaq has and as always had “weaker” listing requirements that the NYSE. And eventually, the then new and up and coming companies like Microsoft, Cisco, and Intel eventually came to dominate the Fortune 500 – and they all started as emerging companies that preferred the Nasdaq. Now companies are going to “prefer” other markets with requirements that are less stringent than the SOX laden U.S. markets.
The liquidity and efficiency of US public markets has alwasy been pointed out as a key advantage the US VC industry has over Europe and Asia. This advantage is fading away with the relative lack of IPOs, and as I mentioned, there might be opportunities for European exchanges to build/become the next Nasdaq.
Another twisted thought: is this actually shielding us from Bubble 2.0 – since it is limiting potential excess to VCs and other professional investors ?
Update: note that I am not suggesting that the fundamental reasonning behind Sarbox – transparency and accountability – is bad, quite the contrary. It just so happens that the current implementation of the regulation is a tax to US businesses because of its heaviness.