If you haven’t noticed, there’s been a small flurry of Los Angeles area IPO announcements lately.
LegalZoom of Glendale announced last month that it plans to sell its stock in an IPO, or initial public offering. Kythera Biopharmaceutical in Calabasas and CKE, the Carpinteria company that owns the Carl’s Jr. and Hardee’s chains, in recent weeks said they want to go public, too.
IPO announcements are a very good sign. They mean that local companies are growing and they feel sanguine about their future. Historically, going public has been the best way for growing firms to get money cheaply. And it’s good for the public because it democratizes capitalism – we can share in the growth of our companies or suffer as they shrink.
And, of course, a healthy IPO market is particularly good for Los Angeles, where the tech sector is hot. Many of those young companies are itching to go public.
Importantly, the three IPO announcements mark something of a reversal. For years, we’ve seen the roster of public companies shrink alarmingly. The number of IPOs nationwide in the last 10 years is down more than 75 percent from the 10-year span that preceded it. And, as I wrote in a column last January, our list of Los Angeles County public companies has dwindled from 200 to less than 170 in recent years.
So why the small flurry now?
Of course, three announcements in a row may indicate nothing more than a fluke. Still, we do have some evidence why we’ve seen these announcements lately.
Both LegalZoom and Kythera cited the Jobs Act as one reason for their IPO plan. More than two months ago, Congress, in a rare moment of agreement, passed the Jobs Act. It’s an acronym for “Jumpstart Our Business Startups,” and it basically suspends many rules and reporting requirements for smaller companies that want to sell their stock. The rules get imposed on them as they get bigger.
That’s significant because the 10-year-old Sarbanes-Oxley Act loaded public companies with so many new duties and costs that many smaller and midsize companies dropped off the stock listings or earnestly courted a bigger company to buy them and end their stock market misery. And many private companies elected not to go public at all – which is one reason and maybe the biggest reason for the precipitous swoon in IPOs over the last 10 years.
Here’s what the Economist wrote of the Jobs Act a couple of months ago:
“Bosses of listed firms gripe that they spend more time complying with rules than cooking up new products. More worryingly, firms that in previous decades might have gone public look at the red tape and decide not do so. Startups used to dream of toppling incumbents; now they aim to sell themselves to Google or Apple. Creative destruction is muffled. …
“The Jobs Act is not perfect. But it starts to cut the rules that cuff American capitalism and should thus be applauded.”
I wish this were the end of the column, and I could say that now, finally, hope is on the way and we’ll soon see many more IPOs. Alas, maybe not.
A sour mood gripped Wall Street beginning last month. There’s newly deepened concern about Europe’s debt crisis, that surprisingly disappointing U.S. jobs report of a couple of weeks ago sent stocks reeling and the so-called fiscal cliff of early next year isn’t exactly a reassuring thought. And, of course, there was the Facebook IPO debacle a few weeks back.
All that is toxic for the IPO market, and investment bankers have been quoted as saying that the pipeline of IPOs has seized up.
Of course, we don’t know what the future will bring. But we do know that young and thriving private companies will go public again when they feel sanguine about their prospects, assured that the markets are steady and uncuffed from many of those rules.