Financial History 142 Summer 2022 - Page 20

Paul Sarbanes ( left ), a Democratic Senator from Maryland , and Michael Oxley ( right ), a Republican Congressman from Ohio , introduced bills that resulted in the Sarbanes-Oxley Act of 2002 .
Even from the start , it was clear that such obligations would be expensive . Securities lawyers and accountants have rarely come cheap and those who work under the microscope of federal regulators , less so .
All those new regulations were designed to ensure that the US securities markets would keep their integrity and continue to attract customers from across the globe . It is fair to say that the US markets still retain their pristine reputation , especially when compared to some others . However , the new rules came with costs that it ’ s fair to guess were not intended .
The first notable consequence was apparent only in hindsight . In the year 2000 , there were 6,917 US listed companies , but that fell to 4,266 in 2019 . What ’ s notable is that not only did the total number of public companies drop , but that they fell to levels not seen since the 1970s when the US economy was far smaller — slightly more than one-third the size it reached by 2019 . One might have expected there to be more firms listed as the economy grew . Yet it didn ’ t happen .
At least part of the blame must come from the huge new costs that companies faced when going public . “ Going public costs more money than ever ; that ’ s a deterrent ,” one veteran Wall Street professional recently told The Wall Street
Journal . “ The allure of public capital can be a mirage when you consider all the costs .” Or , put another way , the added financial burden on corporations would have deterred some from ever going public and others to simply delay their potential IPOs .
Indeed , anecdotal evidence shows companies that went public were far bigger after the Sarbox rules were introduced than they were before . For instance , Netscape , a web browser company , was valued at $ 2.9 billion in 1995 , while in April 1996 , Yahoo !, one of the original internet giants , went public with a valuation of $ 848 million .
Fast forward a few years and things had changed in spades . Meta , formerly Facebook , went public with a value of $ 104 billion in 2012 , and in 2019 Rideshare service Uber went public with a value of $ 82 billion . In other words , Meta ’ s valuation was more than 100 times the value of Yahoo ! on their respective IPO dates .
This also means that these fast-growing tech companies — Meta , Uber and others like them — stayed private during their ultra-fast growth stage . The first major investment in Meta was $ 500,000 made by Peter Thiel in 2004 . By 2012 , that had grown to $ 1 billion by the time of the IPO . Put more simply , it had grown 2,000-fold
in less than a decade . Other , although not all , tech companies see similar speedy early-stage growth .
The fact that such fast-growing companies remain private for longer is likely also contributing to rising wealth inequality . While there are no restrictions for individual investors buying publicly listed stocks , investments in many private companies are restricted to so-called accredited investors . Those individuals must earn at least $ 200,000 in each of the last two years or must have assets ( excluding their primary residence ) of $ 1 million . In 2021 , the average income in the United States was $ 69,000 , meaning that most individuals would not be classed as accredited investors and , therefore , could not invest in the early growth of companies like Meta .
The contrast in returns is perhaps better put in perspective like so . If Peter Thiel , already well-heeled enough to be accredited , had invested just $ 1,000 in 2004 , it would have grown to $ 2 million by 2012 . However , the man on the street , the unaccredited investor , investing $ 1,000 in the S & P 500 would have seen that investment increase to $ 1,400 including reinvested dividends over the same period .
While the two might not be totally comparable , it does show the difference in potential returns between early-stage ,
18 FINANCIAL HISTORY | Summer 2022 | www . MoAF . org