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Trend of declining IPOs starting to reverse in Clayton's 1st year at SEC

Jay Clayton got his wish.

The SEC chairman has championed the public markets throughout his first year at the agency's helm. At a time when private capital continues to dominate many funding strategies, Clayton has introduced several rule changes designed to nudge companies toward entering the public markets.

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Companies seemed to have welcomed the shift. The number of IPOs was on the mend in Clayton's first year, as 187 companies went public between May 5, 2017, the day after Clayton was sworn in as chairman, and May 4, according to S&P Global Market Intelligence data. That is up about 24% from 151 IPOs in the preceding year, and marks the most IPOs since the period from May 2014 to May 2015, when 242 companies went public.

"While there is not a silver bullet to counter the negative trend in the number of U.S. public companies, we will continue working to enhance capital formation opportunities without sacrificing the important investor protections our public company disclosure system has provided for over 80 years," Clayton said during a congressional hearing in April.

The number of companies entering the public markets has been on a downward trend for several years. Between 1998 and 2007, an average of 305 IPOs occurred every year in the U.S., according to S&P Global Market Intelligence data. In the following decade, there were just over 180 IPOs annually on average.

The decline in IPOs comes as the pool of private capital continues to swell, offering an alternative funding source to companies looking to avoid the costs typically associated with becoming and operating as a public company.

Investments from the likes of private equity and venture capital companies have allowed many growing companies to stay private longer, and thus delay taking on such costs, said University of Florida finance professor Jay Ritter, who studies IPOs.

More than half the companies that have gone public in the U.S. over the last 26 years paid underwriters working on their IPOs about 7% of their gross proceeds, according to data from Ritter. That "middle-market IPO tax" was criticized as being too high in a recent speech from SEC Commissioner Robert Jackson Jr.

"The costs of doing an IPO are too high," Ritter said in an interview. "There have definitely been some changes that have made it easier to do an IPO."

Cutting some of the red tape usually required to conduct an IPO has become a key focus for Clayton since joining the agency.

Just two months after Clayton took over as chairman, the SEC began allowing all companies to confidentially file draft IPO registration statements, simplifying the regulatory requirements for going public. Weeks after the SEC announced those plans, Clayton, in his first public remarks as chairman, outlined concerns that the disclosures required of companies during the IPO process were discouraging executives from taking their organizations public.

More recently, the SEC noted in its regulatory agenda released May 9 that it would consider a proposed rule to extend its "testing the waters" program to non-emerging growth companies. The move would allow larger companies to hold talks with institutional buyers and accredited investors to gauge interest in a potential offering before filing any registration statements with the SEC.

Chris Carofine, a spokesperson for Clayton, declined to comment.

Retaining higher levels of IPOs may prove to be a mounting endeavor for the SEC, said Richard Truesdell Jr., a partner and co-head of global capital markets at Davis Polk & Wardwell LLP.

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Moves like expanding the testing the waters initiative would likely be a "win-win," he said. But taking action to promote investor demand for more IPOs would likely fall outside of the SEC's purview, said Truesdell, who has worked with companies including Spotify Technology SA, Goosehead Insurance Inc. and Metropolitan Bank Holding Corp. during their going-public processes since Clayton took over.

Changes the SEC has made during Clayton's tenure have saved the companies money and possibly expedited their entrances to the public markets, Truesdell said in an interview. However, he does not believe the changes ultimately drove companies to conduct their IPOs.

"The things [the SEC] can do unilaterally tend to be marginal as opposed to game changers," he said.