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Pure subterfuge. A thinly veiled attempt to justify tax cuts and deregulation. AIG was killed by accounting? Try again. SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. The WSJ has truly been compromised by Murdoch. NYTimes editorial on the death of the WSJ: http://tinyurl.com/6f879h



SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO.

Wrong, wrong, and wrong.

1. SOX has killed the IPO; IPOs have plummeted since SOX, due to the ridiculously draconian laws that make compliance expensive and time-consuming. Startups and small companies just can't afford the costs, closing one of the two viable exits for founders and investors.

2. "Raising the bar" for IPOs makes it sound like we're just going to get higher quality. The reality is that most companies can't afford to IPO, and even if they can, they're now hampered by greater costs and the distractions of compliance. If the bar needs to be raised, let the market raise it.

3. IPOs are not about consistent revenue generation: they're about raising capital. There's absolutely no reason why a growth business like Facebook that is not profitable shouldn't be able to IPO. If the market likes their odds of succeeding in the long run, their IPO will be a success. If not, it won't. In your model, someone apparently gets to decide who "deserves" to IPO. This kind of thing has never worked and almost always has the opposite effect of that desired.

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I'm willing to buy the argument that SOX is bad for startups. It's easy to knock things, though, and harder to suggest something better. His only suggestion is to lower capital gains taxes. I think there's also an argument that if you can't trust companies' books at all, that creates problems as well.

Wikipedia has some useful information, as useful, see the 'Criticism' and 'Praise' sections:

http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Criticism

My guess is that it's one of those technical things where reworking it to keep what's good about it (making the CEO and CFO sign off on stuff sounds sensible), and dumping some of the bad bits is the best course of action.

I also have a suspicion that perhaps lack of regulations wasn't the biggest problem, but lack of regulatory enforcement with some teeth to it.

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It was conceived at the worst possible time (after Enron, Worldcom, etc); it was bound to be a failure. There's a reason why it's not wise to go shopping hungry. I agree, though, the answer is probably somewhere in the middle.

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This is fun because before doing a startup I was an auditor at Deloitte and then worked in transactions services. It's good to be out. :)

Great points Ryan...just wanted to add a few things:

1. This is mostly true. Going public can add 5 MM - 20 MM in overhead easy...let alone all the additional TPS reports and devoted man hours to bureaucracy. Also, it's significantly harder for companies that are bleeding money to go public; it didn't used to be, which is good and bad.

2. Agreed. Seriously, fuck going public. Going public is for companies who are not profitable, desperately need liquidity (e.g. Google) or capital. You can issue dividends, institute profit sharing programs and even have internal company stock exchanges without being a public company.

3. Just wanted to add that raising capital includes making the company liquid so people can cash out. Private equity firms and some tech shops that went public are a good example.

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There's always the foreign markets. You would be surprised how much ridiculously more rigorous US accounting rules are than anywhere else in the world. The EU, London, Australia, Hong Kong, take your pick. Nobody else has the rules we do, which is one reason why European exhcanges have gained in relative prominence in recent years.

Of course, they don't have a financial PATRIOT act to contend with (our Sarbox).

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1) I dug up the following table - it doesn't appear that SOX killed the IPO. There were over 150 IPOs each year from 2004-2007:

http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf

(The question is what the heck is going on in 2008?)

2) Yes, we are getting better quality. If you were around for the fluff IPOs of the late 90s you'd agree. For every Kana Communications there were at least 9 other immature flops like pets.com, etoys.com, flooz.com that died within 3 years.

3) Companies get to choose their own destiny. If they're ready to IPO they'll swallow the $5million overhead of SOX and head out to the market. Those that can't swallow the cost or time will either have to wait or find alternate means.

That said, SOX is still a beast born of a knee-jerk reaction and I'd love to see it streamlined. But there's some good in there.

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[deleted]

Do you have a source of the pre-SOX company IPOs vs post-SOX company IPOs? I'm more curious than anything. SOX didn't just eliminate fluff it eliminated many profitable companies who don't have the earnings and market size to justify going public. This is fine by me - going public is overrated anyway.

The companies that are too immature to do SOX just simply don't deserve to IPO.

It has very little to do with maturity. Just like the Patriot Act, SOX was an overreaction. It adds layers & layers of red tape & costs (even if it has "worked", which I don't know one way or the other). While it has certainly weeded out some bad companies, it's discouraged some good companies from going public as well.

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Here's an IPO table covering 1980-2008:

http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf

Interesting to see that 2004-2007 there were over 150 IPOs. 2008 has just 20, roughly half venture backed.

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That doesn't say whether or not it is US only.

And the 2000s still look sickly, at about half the trend of 1980-2000.

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Thanks for the link.

M&A has taken a blow too (article is slightly dated):

http://www.americanbanker.com/usb_article.html?id=20080325E4...

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stock jockies lead to the first bubble? and the fed drastically cutting the lending rate in 1995 had nothing to do with an expansion of the money supply?

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SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok.

Actually it has. It introduced a qualitative change in liability for corporate executives. Selling now has way, way less downside. The reason that's not "ok" is that a higher hurdle doesn't merely cause companies to wait before IPOing. They get bought instead. Result: no new public companies.

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"Result: no new public companies."

Thanks for answering my implicit question about why an investing member of the general public should care about whether start-ups get bought out by existing companies or go public themselves. It makes sense that over the long haul, a more diverse ecosystem of publicly traded companies makes for a more resilient economy and more opportunities for small investors to make profitable investments.

Of course, the current tanking of the stock market all around the world, by no means only in the United States, might suggest that small investors need to know that the ecosystem does have selection pressure for transparency and accuracy of corporation statements to investors. I appreciate the replies by various participants here on how Sarbanes-Oxley has a different cost burden for new, smallish start-ups as contrasted with established, large public companies. Perhaps adjustment of some rules to take into account the size of a firm is in order.

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Or they issue dividends :).

What's wrong with having fewer public companies?

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Concentration of wealth and less efficient capital markets.

There's really nothing wrong with it from most entrepreneurs' POV: they build something people want, they get paid for it.

The problems occur at the margins: the businesses that could be started with enough outside capital but can't be bootstrapped off initial cash flows, or the small investors that are perfectly capable of doing due diligence on companies but are banned from investing because all the attractive investment targets are private. It's really an opportunity cost issue: things work okay, nobody gets visibly screwed over, but all sorts of little transactions that would make life better for everyone never take place.

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But wouldn't other outside capital forces emerge (e.g. private equity, VC, etc?).

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Like Goldman Sach's private stock exchange? Sure, but as they grow they run into the same problem as public capital markets. Eventually somebody prominent gets screwed, they make a big stink about it, and the government regulates them as if they were public.

This is basically the story behind investment trusts, mutual funds, and hedge funds. Back in the 20s, everybody put their money into investment trusts. They got screwed by the Great Crash, so the government put all these restrictions on public investment vehicles (can only invest in stocks & bonds, can have no more than 1.5% of assets in any one security, etc.) and the trusts were reborn as regulated mutual funds.

Then people realized that because mutual funds were so regulated, they were leaving money on the table, and all these alternative asset classes like commodities, timber, derivatives, venture capital, etc. were ripe for the taking. So they created a new class of investment vehicle, hedge funds, without the regulations but only open to people who supposedly know what they're doing.

Now ordinary people are investing in hedge funds indirectly, through funds-of-funds and pensions, and they're getting screwed. So there're calls to regulate hedge funds now.

Financial markets treat regulation as damage and route around it. Unfortunately, they sink many suckers in the process and create demand for new regulation, and so on.

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But the thing is, if it's so cat & mouse does it really matter if they are fewer public companies? That was my point.

It's hilarious because hedge funds are a scam (based on traditional 2 & 20 fees alone). Then someone creates fund of funds, which is a scam of a scam. And people are dumb enough to buy it.

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I think it is appalling that entrepreneurs agree with SOX regulations. Nowadays, only companies making at least $500M annually can afford an IPO. Very few companies will ever be this big. This is destroying the incentive for capital investment.

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Entrepreneurs don't care about it because they're still getting rich. They either sell out to a large public company and take their millions, or they keep the company private and cash their dividend checks for millions.

The people really hurt by SOX are:

1.) Early startup employees. These people don't get rich unless the company gets really big - like, public-company big. Acquisitions tend to cut their growth potential and fold them into a larger corporation just as they're hitting their stride. And if the company just stays private, they never see liquidity on their stock options, and might as well not have them (in fact, many companies that intend to stay private just don't give out equity, because it complicates financial reporting). They're screwed either way.

2.) Customers. Because exits are smaller, capital costs are lower, and it's very difficult to convince someone to join your startup, recent startups tend to be less ambitious. That's why there're all these complaints about "frivolous" Web2.0 companies. Building an ambitious company, like another Google, after SOX would require convincing investors that the company can get big enough to justify the SOX reporting costs, convincing employees that it'll succeed in that, and then actually executing on that while shunning acquisition offers. It's much easier just to pick off the low-hanging fruit.

3.) The investing public. They're shut out of investing in promising growth companies. Instead, they have to put money into large existing companies, which blow shareholder wealth on overpriced acquisitions. The managers get rich, the entrepreneurs get rich, the retail shareholders get screwed.

It's telling that in Web1.0, most people dreamed about joining a successful startup. In Web2.0, most people dream about starting a successful startup. The incentives are not there for people to sign onto an existing company.

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Keep the company private and cash their dividend checks for millions.

Yes! I wish more people talked about this. Especially with the tax benefits, issuing dividends is the way to go.

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Would employees see any of this? Or particularly an amount that would have justified taking a below-market salary, leaving an excellent position (remember that good help is hard to find? you have to woo great employees away from elsewhere) in big-co and working hours?

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Sure - anyone with equity would (under normal company structures). So all the founders have to do is give employees equity or institute a profit sharing program.

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Also, how is this subterfuge? The argument is that Washington is killing Silicon Valley's innovation machine through higher taxes and regulation. What did you think the article was about from the title?

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It's an opinion piece. It's not even Journal's opinion, but the author's. Opinion pieces are basically rants and should read as such, whether or not they are correct at the core. This is easier with paper edition, where the context is much more obvious.

It's important to note the section when reading Journal's articles online, lest one treat an opinion of Mumbalumba's propaganda minister as WSJ front page news.

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AIG was killed because they were run by amateurs who didn't know what they were doing. See also: Ford, GM, Chrysler, Lehman Brothers, etc.

It's very unfortunate that they brought down a lot of other people along with them.

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