Research finds that SEC’s IPO evaluation process is antiquated, causing unnecessary delays.
A recent study suggests that the Securities and Exchange Commission’s (SEC) IPO review process is outdated and creating unnecessary bottlenecks, according to a University of Kansas associate professor of law. The study highlights that companies looking to go public are required to file a document with the SEC for review before allowing ordinary people to trade their securities. However, this 90-year-old regulatory custom dictates that investors cannot see the filing until the SEC staff conducts a detailed, months-long review, causing delays in the IPO timeline.
The research outlines how the SEC’s review process, which originated in the early days of the organization, no longer aligns with the current state of the market. Factors such as increased company expertise, the sophistication of IPO investors, and stricter regulations mean that the initial justifications for the review process are no longer relevant. Despite these changes, the review process continues to add significant time and costs to the IPO process without clear benefits.
The study, available on SSRN and forthcoming in the Berkeley Business Law Journal, suggests that the SEC’s extensive review process is deterring some companies from going public altogether. A five-month delay in the IPO process can have significant consequences, leading some businesses to withdraw from the process entirely. The author of the study proposes a streamlined approach to the IPO process, where the SEC focuses on enforcing violations and setting disclosure rules while leaving the evaluation of offerings to private market actors.
The study’s author compares the SEC’s role in the IPO process to a parent insisting on training wheels for a 20-year-old, highlighting the disconnect between the current system and the market’s needs. With new leadership expected to take over the SEC, the study suggests that now is an opportune moment to reassess and modernize the existing IPO review process. By sparking discussions around the inefficiencies and bottlenecks created by the comment letter process, the study aims to encourage reform within the SEC to promote more efficient and effective IPO procedures.
