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August 7, 2009

The increasing cost of public equity

frank quattrone google Frank Quattrone, the former CSFB investment banker who has an interesting perspective, notes a dynamic of the now almost decade-long criminalization of business that I have been warning business owners and lawyers about for quite some time now -- the increasing cost of public equity:

[W]hy did [public offerings] disappear in the first place?

One reason is the heightened bar for small companies to go public, Mr. Quattrone said. Throughout his career, he said, some of the greatest companies he was associated with had $30 million to $50 million in revenue when they went public. Today, he said, bankers require companies to have $100 million or even $200 million in revenue.

Part of the underappreciated societal impact of prosecutors such as those on the Enron Task Force implementing the criminalization of business lottery is that the days of small companies tapping public equity for relatively cheap venture capital are gone. Moreover, the supply of executives who are willing to work for public companies is smaller because many of the best and the brightest simply do not consider the risk of operating in the public domain worth the draconian downside. The result is that investment alternatives for investors in public markets are declining.

Not exactly a policy to encourage economic revival, now is it?

Update: Along the same lines, Larry Ribstein reviews the destruction of public equity wealth in regard to AIG that resulted in no small part from Eliot Spitzer's machinations. It's a risk that I first noted in regard to AIG way back in early 2005. When will we learn?

Posted by Tom at August 7, 2009 12:01 AM |


Closely correlated to the criminalization of business management, don't forget that the requirements and costs associated with a publicly traded firm's SarbOx compliance are way out of line with a typical small company's revenue levels.

As a result, there's been a small-company IPO explosion in London over the past several years, as capital-seeking smaller firms have directed their efforts to a jurisdiction that does not impose SarbOx-like rules on public companies.

It has has been estimated that SarbOx compliance alone has cost the American economy hundreds of billions of dollars since its enactment, and to no good end.

Posted by: Steve Tessem Author Profile Page at August 7, 2009 8:47 AM

Excellent point, Steve, and a valuable one to to keep in mind as Congress embarks on its next round of regulatory reform. In this particular case, the medicine is worse than the disease.

Posted by: Tom K. Author Profile Page at August 7, 2009 8:55 AM

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