The IPO market is a hallmark of the U.S. capitalist system. It has helped propel iconic companies like Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG), Starbucks (NASDAQ:SBUX) and Wal-Mart (NYSE:WMT) to corporate success, and made their investors rich.
However, it seems the IPO wealth-creation machine has not been working so well lately.
Seemingly hot companies Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN) have suffered massive losses. Facebook (NASDAQ:FB) — expected to be the IPO hit of 2012 — has been riddled with gaffes and now looks like one of 2012’s biggest catastrophes.
What’s going on here?
In reality, the recent high-profile implosions have created a distorted view of the market. If you look past the wreckage, you’ll notice a variety of solid offerings, such as Michael Kors (NYSE:KORS) and Annie’s (NYSE:BNNY). And for as bad as the social space has been, LinkedIn (NYSE:LNKD) has found its way, too.
Still, it’s understandable that the widely publicized Facebook fiasco has taken its toll on investors’ mind-sets. The media heralded the deal as the savior of the IPO market. The thinking was that it would soar in value, opening the floodgates to a host of other sizzling deals featuring hot names like Twitter, Square and Airbnb.
But in the real-time world of today’s markets, hype doesn’t last long, and investors demand results. Disappoint, and your stock will get crushed. So it was with Facebook, and so went the cloud of momentum the market expected to ride for the rest of the year.
Still, IPOs face another broader issue: regulatory structure.
After the accounting scandals at Enron and WorldCom, Congress and President Bush wanted to repair the financial system, which sustained a big hit to confidence. To this end, they passed the Sarbanes-Oxley Act, or SOX, a law that implemented rigorous requirements for public companies, and also upped the potential financial and criminal penalties for senior executives who crossed the line.
As a result, the IPO market saw much less activity. The past few years have seen roughly 100 to 150 deals annually, while in the 1990s that figure was around 400 to 500.
Simply put: Companies have delayed their IPOs or have decided to sell out instead. Facebook provides yet another example, as it waited eight years before finally pulling off an IPO.
And that means investors lose out, because they have fewer opportunities to get into early-stage companies; instead, angel investors and venture capitalists get more of the action.
On this front, the news is better. Politicians have woken up to these issues and have taken action. This year, Congress and President Barack Obama passed the JOBS Act, which has relaxed some of the tougher requirements of SOX, such as Section 404(b). 404(b) mandates that registered public accountants attest to a company’s internal controls, which is a time-consuming and expensive process. There also are fewer requirements for audits.
For the most part, these reforms are likely to make it much easier for early-stage companies to come public. And the timing couldn’t be better, as the tech industry is traversing a variety of mega-trends like mobile, the cloud and big data — all of which could produce breakout IPOs.
So don’t give up on the IPO market. It’ll pick up again, and the next couple years could be a great time to find big opportunities.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.