Startups are like children. They are imaginative, grow quickly, and will define the world for the next generation. Unfortunately, they’ve have been stuck with a bad set of parents. Whereas most parents do their best to indulge a child’s creativity and nurture their innate talents, the federal government has actively set up roadblocks to startups’ success. And it’s left our economy grounded.
The negative impact this has had on the economy cannot be overstated. New research from the Kauffman Foundation reveals that job growth in the United States is driven entirely by startups, not established firms. Their study reveals that from 1977 to 2005, startups create an average of 3 million new jobs per year while existing firms are responsible for 1 million net jobs lost. Or, as the Kauffman Foundation so bluntly said, “Without startups, there would be no net job growth in the U.S. economy.”
Sadly, since the mid-2000s, this engine of innovation has begun to stall. According to a separate study from the Kauffman Foundation, startups are starting smaller and growing more slowly, reducing job creation by a full percentage point since the 1980s.
Given that data, the federal government should be doing everything it can to help get startups off the ground. Unfortunately, in recent years Washington has done just the opposite. Regulation FD (Fair Disclosure), aging SEC regulations, and now, Dodd-Frank, have contributed to a hostile environment for many start-ups.
But Sarbanes-Oxley is perhaps the worst offender. Section 404 of Sarbanes-Oxley requires publicly traded companies with a worldwide value of $75 million or more to write an assessment of internal controls and use a public accounting firm to audit the report and attest to its adequacy.
The rule proved incredibly expensive - often exceeding $1 million for small companies. Set against the backdrop of myriad other costly rules and regulations, many startups made the financial decision to avoid going public.
As Second Market founder and CEO Barry Silbert explained in testimony before the House Subcommittee on Capital Markets and GSEs, this thicket of rules is leading many startups to avoid going public.
“Companies are electing to remain private longer than in previous decades, and the average time a company remains private has essentially doubled in recent years,” testifies Silbert. “Moreover, the profile of companies going public has dramatically changed. Today, only the very largest companies are going public, and are receiving the sales and research needed to successfully navigate the public markets.”
The result of this “systemic failure,” Silbert notes, is a lack of liquidity for upstart companies that “inhibits our economy’s ability to create jobs, innovate and grow.”
Fortunately, some in Congress are endeavoring to fix this “systemic failure.” This week Sens. DeMint (R-SC) and Barasso (R-WY) will introduce the “Startup Expansion and Investment Act,” which would allow shareholders of public companies with market valuations below $1 billion to opt out of Section 404 regulations. This follows Rep. Quayle who introduced a nearly identical bill in the House of Representatives earlier this year. Quayles bill includes an additional requirement that companies could only opt out within the first ten years of going public.
Such a move would encourage young, high-growth companies to go public in order to take advantage of the new liquidity. It’s the equivalent of nurturing a child as he grows toward adulthood. And as these startups grow into the next Apples and Facebooks of the world, Washington can look on as a proud parent knowing they eased the path to success.