Indeed, over the past decade, many sources have reported a precipitous decline in the number of initial public offerings (IPOs) in the United States—particularly for small companies. The recent decline in IPOs raises several questions: what has caused such a decline? At the same time, while IPOs appear to have fallen in the United States for a variety of reasons, the amount of private stock offerings has increased during this period. This report analyzes the factors contributing to the decline in IPOs and discusses whether that decline is significant; the differences between an IPO involving the sale of shares to the public versus a private stock offering for sophisticated investors; and the potential economic implications of a rise in private versus public stock offerings. On April 5, 2012, the Jumpstart Our Business Startup Act (JOBS Act; P.L. 112-106 ), which is broadly aimed at boosting capital formation, was enacted. Such "private stock offerings" cannot be sold widely to the public, but only to certain "sophisticated" investors. As such, the SEC has established certain exemptions from the registration and disclosure requirements of the federal securities laws for companies that either seek to raise only a small amount of equity capital (less than $5 million) or to sell shares only to a limited number of sophisticated investors, rather than to the general public. Among other things, the JOBS Act relaxes statutory restrictions on launching IPOs, eases the regulatory and disclosure obligations of firms it identifies as "emerging growth companies," reduces restrictions on promotional communications surrounding private offerings, and establishes a higher shareholder number requirement before a private company becomes subject to public company reporting requirements. A company can opt to be defined as an EGC, and then enjoy certain regulatory exemptions as a result of that status, until the earliest time it meets any one of the following conditions: (1) it reports $1 billion or more in annual gross revenues—an amount that will periodically be indexed for inflation; (2) it becomes a "large accelerated filer," which SEC regulations define, among other factors, as a company with a global market float of $700 million or more; (3) the company reaches the fifth anniversary of its IPO's offering date; or (4) the date on which the company has, within the previous three years, issued more than $1 billion in non-convertible debt. The proposed rule would allow companies to use general solicitation and general advertising to offer securities under Rule 506 of Regulation D of the Securities Act and under Rule 144A of the Securities Act. After a 30-day period of public comment, the SEC will vote on whether to adopt the rule as a final rule. Other studies have found a similar, pronounced drop in IPOs. An apparent decline in the U.S. share of IPOs worldwide leads to several corollary questions: what are the implications, if any, for the U.S. economy, and particularly for job creation? What are the causes of this decline? Implications: Decline in IPOs and the Question of Job Creation

Those proposing to streamline the process of raising equity finance, including some supporters of various capital market bills currently being considered by Congress, argue that improving the ability of companies to do both public and restricted stock offerings will benefit the nation through expanded job creation. What Has Caused the Decline in IPOs? First, there are the direct costs, in terms of fees to underwriters, advisers, lawyers, and accountants. These IPO infrastructure-related impediments include (1) lower trading fees for mainline securities firms that stemmed from the rise of online discount brokerage firms; (2) the SEC's order-handling rules; and (3) the decimalization of traded securities (wherein stocks that were historically incrementally priced in fractions were subsequently priced in cents, thereby reducing broker's bid-ask spreads, and thus brokers' profits from market-making for IPO shares). Although studies show that younger firms (i.e., startups) are particularly important for job creation, most have not addressed the question of whether the form of growth financing for young firms—for example, through acquisition, or through IPOs—is a factor in creating jobs.
Over the past decade, many sources have reported a precipitous decline in the number of initial public offerings (IPOs) in the United States. These statistics raise several questions: what has caused such a decline? What are the implications for the U.S. economy, and particularly for job creation? At the same time as IPOs appear to have fallen, the amount of private stock offerings has increased, suggesting growth in an alternative source of equity financing.
This report analyzes factors contributing to the decline in IPOs, differences between an IPO involving the sale of shares to the public versus a private stock offering limited to sophisticated investors, and potential economic implications of such a rise in private versus public stock offerings. It also provides analysis of the causes and implications of the stagnation in public IPOs.
The decline is particularly noticeable for IPOs by small companies. Because startups are usually small, and have been widely associated with job creation, there are concerns that whatever is causing such a drop in IPOs is hindering job creation. While research finds support for a link between startups and job creation, there does not appear to be a consensus among academics that the form of financing that a startup uses to grow—that is, through acquisition, through an IPO, or through the issuance of private shares to sophisticated investors—affects job creation. Indeed, while the number of IPOs has dropped, the number of private placements of restricted shares sold only to qualified investors has risen markedly, especially in 2009 and 2010.
Central to the question of how best to stimulate capital formation and IPOs is what has led to the decline in IPOs. Researchers and market participants cite several possible causes. These include regulatory factors, such as the Sarbanes-Oxley Act in 2002 (P.L. 107-204); the costs of initial and ongoing disclosure to investors; a relaxation of the mandatory holding period for restricted shares by the SEC, which may have fostered liquidity in the alternative private placement market; and the costs of filing with individual states for certain securities offerings. Other research points to changes in securities market infrastructure as causes of the IPO decline. Such changes include the cost of underwriting IPOs; reduced trading fees for mainline securities firms stemming from the rise of online discount brokerage firms; a change in the SEC's order-handling rules; the decimalization of traded securities, thereby reducing brokers' profits from trading; and a requirement establishing a firewall between underwriting and analyst research, which some say has made it costlier to provide research to support small IPOs.
Enacted on April 5, 2012, in the 112th Congress, the Jumpstart Our Businesses Startup Act (JOBS) Act (P.L. 112-106) is broadly aimed at stimulating capital formation for companies, especially for relatively new and smaller ones. Among other things, the JOBS Act lifts certain impediments to a small company external financing technique known as crowdfunding, establishes a category of firm known as an emerging growth company (EGC), and relaxes various disclosure and accounting requirements for such firms. Criteria for EGC status include having up to $1 billion in annual gross revenue and having less than five years elapse since its initial shares were first sold to the public. In late August 2012, some Members of Congress criticized the SEC's decision to issue a proposed rule, with a 30-day public comment period, rather than a quicker, final interim rule without the comment period. Others supported this approach. The SEC's proposed rule would relax traditional restrictions on the ability of a company to use general advertising to promote securities offering to certain defined-sophisticated investors under Rule 506, and under Rule 144a, which exempt certain securities from SEC registration. This report will be updated as events warrant.