IPOs and the Wealth Gap

IPOs and the Wealth Gap
Reddit CEO Steve Huffman stands on the floor of the New York Stock Exchange while ringing a bell on the floor setting the share price at $47 in its initial public offering (IPO) in New York on March 21, 2024. (Spencer Platt/Getty Images)
Jeff Carter

Recently, a few companies went public on Wall Street. One, Reddit, has done spectacularly. Former President Donald Trump’s social media network went public and hasn’t done so well. Astera Labs went public before both and is trading right around its IPO price. Public IPOs in 2024 are down by 70 percent from 2021.

That’s not because there aren’t great companies worthy of public markets being built. It has to do with other factors.

When companies go public, it is a great event for investors and employees of the company. They are able to cash in investments and redeem options granted to them. It’s also a great sign to customers and potential customers because being a public company is a sign of stability.

In the old days, Microsoft went public at just more than a $300 million valuation. The general public could have invested and made millions. The Motley Fool ran this calculation in late 2022 (it’s worth even more today):

“Microsoft completed its initial public offering (IPO) on March 13, 1986, at a price of $21 per share. Since then, the company has grown so valuable, and its stock price has soared so high, that management opted to conduct nine stock splits over time to ensure its shares remained accessible to small investors.

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“Had you invested $1,000 in Microsoft at its IPO, you would have acquired 47 shares at $21 per share. Adjusting for the stock splits, you'd actually have 13,536 shares today with a cost basis of $0.0729 per share.

“Given Microsoft now trades at $238.73 per share, that translates to a return of 327,401%.

“In dollar terms, that $1,000 investment in 1986 would be worth a whopping $3.23 million today. But it gets better, because Microsoft has paid a dividend since 2003—and assuming you never sold a single share along the way, you'd have also received $341,513 in dividends.”

The problem is that most people can’t invest in IPOs. The IRS prohibits it because they aren’t “accredited investors.” Only the wealthy are considered accredited investors. They get to invest in companies such as Reddit far before the public and reap the rewards when they are successful. That’s the way in which many of the wealthy become wealthier.

On the flip side, government regulations also stop companies from going public. In response to two public company frauds, the government instituted Sarbanes-Oxley legislation, and in the aftermath of the mortgage meltdown in 2008–09, the government instituted Dodd-Frank.

Both pieces of legislation are abysmal for Americans and American businesses.

The Sarbanes-Oxley Act had the chilling effect of making it much more expensive to be a public company. When it’s artificially more expensive, companies find another way to raise capital. They have through the private markets. As I illustrated above, the public is frozen out of private markets.

The Dodd-Frank Wall Street Reform and Consumer Protection Act crushed a lot of our previous financial system in the spirit of decreasing risk. Yet it didn’t decrease any of the risks. One offshoot of the Dodd-Frank legislation is a very large private lending market that skirts all banking regulations. Private equity and nonbank lenders have stepped up activity in a big way.

Data from several companies that monitor the startup system show that there are $1.6 trillion of unrealized gains from 2015–19 startup investments. Those companies are not going public, so the regular citizen doesn’t have access. However, wealthy people and institutions do, and they actively write checks to them.

That makes the wealth gap even larger in the United States.

We need to repeal both Sarbanes-Oxley and Dodd-Frank. We need to make it cheaper for companies to access public markets. With the advent of computerized trading, the process of administering and fostering a liquid public market is significantly easier than it was even 10 years ago.

Letting all Americans invest in American companies builds more wealth and does it faster than any government program or through any combination of government regulations to keep us safe.

The government never actually does seem to keep us safe and exacerbates the problems it is trying to solve.

Jeff was an independent trader and member of the CME board, started Hyde Park Angels and West Loop Ventures in Chicago. He has an undergrad degree from the Gies College of Business at Illinois, and an MBA from Chicago Booth.
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