SEC Commissioner Calls Small Company IPO Economics “Broken”
Commentary by Steven Lofchie
SEC Commissioner Mark T. Uyeda asserted that the economics of going public no longer work for smaller firms and called for a regulatory overhaul to make small company IPOs viable again.
In remarks before the Small Business Capital Formation Advisory Committee, Commissioner Uyeda cited data showing that "small companies made up 44% of 2024 IPOs, but raised only 3% of the capital." He said the "fixed compliance costs, underwriter economics, and a regulatory framework calibrated for large issuers make it extraordinarily difficult for small companies to raise meaningful capital through a public offering." He also noted that the SEC Office of the Advocate for Small Business Capital Formation found that 44 percent of small- and mid-cap stocks carry no analyst coverage - meaning limited investor interest, poor liquidity, and weak price discovery after a listing.
He framed the core question as one of regulatory calibration: whether public company rules are designed for companies that need capital access, or for large firms that can absorb compliance costs. Ordinary investors, he said, are increasingly locked out of early-stage growth that plays out entirely in private markets. He suggested four areas for Commission action: (i) modernizing the shelf registration process; (ii) revisiting quarterly reporting requirements; (iii) reviewing the emerging growth company framework; and (iv) updating outdated filer category thresholds.
Commentary
To Commissioner Uyeda's four areas for action, there should be a fifth: changing the rules governing the production of investment research. After the research scandals of the dot.com era, the SEC and other regulators treated the production of investment research as if it were a public utility, as to which the producers of the product were not entitled to make a profit or to have any control over the uses/distribution of the product.
That approach to the regulation of research is a demonstrated failure; i.e., small companies go without research produced on them, and no doubt even those companies that have research about them don't have much. Investment research provides a public benefit; but it is not a public utility. If there is no profit in producing it, there will be no public benefit.