As I outlined in my previous Blog there are five contributing factors that changed the IPO marketplace for small emerging growth companies.

1. The crash of IPO markets in late 2000.

The IPO markets were fueled by one thing in the late 90’s – The Internet.  From 1997 through the end of 1999 just about anyone who had an Internet concept for a company could go public.  You didn’t need revenues or earnings, just a concept.  Many of those “concepts” were funded for hundreds of millions of dollars until 2000 when investors came out of the ether and had a reality check.  By the end of 2000 the Internet bubble had burst and investors witnessed more public Internet companies crashing and burning than you could see at a NASCAR event.

2. The introduction of SOX
The crash of the IPO markets was then followed by the spectacular fall of some very large and well known public corporations such as Enron and WorldCom.  Sprinkle on several insider trading scandals and add a dash of overindulgence by the a few CEO’s and you have a recipe for – Government Intervention.

At the culmination of these events there were several government investigations which resulted in the passing of Sarbanes Oxley (“SOX”).  SOX was intended “to protect the investing public” by establishing a new set of rules for public companies.  However, the cost to implement and comply with those rules cost the average public company over $3 million a year.  Even though the SOX rules were intended for large corporations they also mandated that even the smallest public reporting company must adhere to the same set of rules.  This was a death blow for small emerging growth companies.

3. Risk/Reward for large underwriters

Under the new SOX legislation CPA firms (who caused this mess in the first place) and Underwriters suddenly became liable for public companies that they represented.  Therefore they suddenly changed their criteria for underwriting.  No more startups or emerging growth companies.  They now were only interested in old established brick and mortar companies with a history of revenues and earnings.  If you look at the average company going public today you will notice the average IPO raised over $200 million.  Therefore the average public company valuation averages over $700 million.

4. Consolidation of the stock brokerage business

During this time period there was also a consolidation of the stock brokerage business.  With the introduction of Schwab, ETrade and Ameritrade investors could now purchase stocks online for as little as $10 per trade.  They no longer needed their stockbroker to make a trade.  They now had Internet access to as much, if not more, information than their brokers.  The stockbrokers started to disappear.

5. Disappearance of the small boutique underwriter

The small boutique underwriter who performed many of the smaller IPO’s stated to disappear once the Internet bubble burst.  IPO’s dried up and the smaller players could not survive.  Their stock brokers who mad a living selling shares in new companies had no new company shares to sell.  Investors who were previously overly exuberant and game to invest in just about any deal were now taking huge losses and pulling out of the market.

So, basically the IPO markets were dead for small companies from the end of 2000 until about 2004.  This was about the time were started hearing rumblings about proposed exemptions for small companies concerning SOX reporting issues.  That is when Reverse Shell Mergers started making their way to center stage.

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