Securities and Exchange Commission Chair Jay Clayton is making good on one of his early promises by simplifying the early-stage process for companies considering going public.
In a 5-0 vote, the SEC agreed to expand the so-called “test-the-waters” accommodation, which will allow all issuers to engage certain qualified institutional investors prior to filing a registration statement.
The rule previously only applied to emerging growth companies, but the expansion is intended to encourage more issuers to consider entering the public equity markets.
“Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings,” SEC chair Jay Clayton said in a statement on Thursday.
The move was one of Clayton's early initiatives when he started at the SEC in 2017. In a speech to the Economic Club of New York, he noted, "I have been vocal about my desire to enhance the ability of every American to participate in investment opportunities, including through the public markets."
It is unclear whether the move will help IPOs that were not well received in the future. On Thursday, Peloton shares fell 11 percent in its debut and earlier in the week WeWork suspended its plan to go public after CEO Adam Neumann was forced to step aside amid governance issues.
He is not alone, Nasdaq CEO Adena Friedman previously told FOX Business that cumbersome regulation had been preventing companies from going public.
“The act of going public today is such a difficult decision, and there’s so many new obligations and regulations that are placed on companies when they go public, it makes it very much a difficult decision today,” Friedman said last year.
The Nasdaq competes with the New York Stock Exchange, owned by ICE, for listings which are considered a lucrative business for the exchanges.
There are a number of reasons why some companies may opt to stay in the private market, including the fact that there are fewer transparency requirements – which means not having to hire more lawyers and accountants (fewer overall expenses). Companies have also been able to tap large pools of equity held by hedge funds.
Clayton has said that a reduction in U.S.-listed companies hurts Main Street investors who are unable to participate in their growth.