In the story of the rapidly vanishing high-technology IPO, the Sarbanes-Oxley law bringing independence and accountability to financial disclosures has become the chief villain. Bill Gurley and Fred Wilson were some of the first, in the summer 2008, to complain of Sarbanes-Oxley. But their timing was poor: due to barely understood and hardly disclosed financial risks, global capital markets collapsed a few months later.
Once that happened, the case against the Sarbanes-Oxley law definitely got worse: at one board meeting I attended at the beginning of the crisis, a director talked of stocking up on bottled water. But the fact that the Bush & Obama governments prevented a global economic apocalypse hasn’t deterred more complaints about regulation in general — and about Sarbanes-Oxley in particular. Whenever the topic of IPOs comes up, as it did this weekend on TechCrunch, you’ll see a comment like this, which now stands as the most popular for the post:
What congress created with Sarbanes-Oxley and other regulations was a rule saying, basically: “Don’t let ordinary Americans invest in any new tech companies. Only big companies and the very rich are allowed to do that.” If you try to regulate away every risk, you regulate away the ability to do most regular things too.
Ah yes, moral hazard! Buyer beware! Let ordinary Americans take risks! Well, hey, I love risk. If Grandma wants to buy 10,000 shares of the latest incarnation of Enron or Lehman Brothers, I’m all for it. I just want her to be able to know what she’s buying. She may not care for detailed product plans or revenue forecasts. But she at least should be able to get a sense of whether, in the past, you know, the company made money or lost money.
Since that is the only object of the Sarbanes-Oxley law, I’m not sure which part of it is so objectionable. Is it the requirement that the CEO and CFO of a publicly traded company be accountable for the accuracy of its financial statements? Or the rule that “independent” auditors can’t be paid in side-deals by the business they’re supposed to be auditing? Or is it the ban on off-balance sheet investments, which precluded investors from knowing about the very existence of liabilities that bankrupted a company like Enron?
These are the main requirements imposed by the bipartisan bill, which passed by a vote of 423 – 2 in the House and 99-0 in the Republican-controlled Senate, before being signed into law in 2002 by President George W. Bush. Like any regulation, the law imposes some costs on a business, requiring the accounting department of a publicly traded company to institute basic controls that can cost hundreds of thousands per year. But I think these are worth it if the company wants to sell stock to any consumer — even if it means some marginal IPO candidates delay going public to get their house in order.
I am sure there are many silly laws. I often get the feeling, walking through Washington DC, that the government is big. I agree with Fred Wilson that the development of alternative markets for startups to get liquidity is a good thing. But a law requiring the CEO to take responsibility for accurate financial statements is a good thing too. And the dearth of tech IPOs has almost nothing to do with that.