Written by wordpress627 on August 23, 2018

Thanks to our relationship with Audit Analytics, we’re able to bring you this exclusive new research series.

PART THREE: Accounting and legal fees adding up

Several reasons explain why there have been fewer SEC registrants since the early 2000s. Some point to regulation, citing increased disclosure demands from SOX 404, or the 2012 JOBS Act provision that increased the SEC reporting thresholds from 500 shareholders to 2,000.

Still, a 46% fall in SEC registrants is significant. The causes are varied, and it remains to be seen how much impact regulatory efforts will have.

Other explanations include an increase in merger and acquisition activity, a slowdown in the IPO environment, and a growing preference for acquiring capital through private debt rather than through public equity.

A company’s size may be an issue. SEC Commissioner Robert Jackson said in an April speech that middle-market companies often pay the same price for going public, 7%, but that large companies can negotiate for a lower fee, citing Facebook’s IPO fee of 1.1%.

Research shows that non-regulatory changes are having an impact. Columbia University Professor John Coffee notes the underwriting fee is between 70% and 80% of the costs. But the monetary costs are only part of it; an IPO’s real cost is diverted executive time, such as putting on a multinational “roadshow,” and potential litigation costs unrelated to the regulatory burden.

Since IPO costs were named as one of the reasons for declining IPO activity, we looked further into this reason. The chart below shows average accounting and legal fees by year.

Average fees by year fluctuate, but accounting and legal fees as a percentage of IPO proceeds largely remained in the 0.8% range, with a peak high of 1.4% in 2016. The peak at 2016 could be explained by a pure statistical fluctuation. 2016 was a local minimum in IPO proceeds, as shown below – so the same level of fees would be a higher percentage of the proceeds.