Letter to Mary Jo White, Securities and Exchange Commission Chair and Richard Ketchum, Financial Industry Regulatory Authority Chairman - Himes leads letter to SEC, FINRA regarding IPO Gross Spreads

Letter

Dear Chair White and Chairman Ketchum,

We write to you as supporters of the Jumpstart Our Business Startups Act ("JOBS Act"), which was designed to lift some of the regulatory burdens and expenses faced by young companies electing to undergo an Initial Public Offering ("IPO"). During consideration of the JOBS Act, compliance associated with becoming a public company was estimated to cost an emerging company between $1-3 million per year. Reducing that cost at a time of capital scarcity was a worthwhile endeavor.

We ask for your consideration and examination of a cost that may, in many cases, exceed the aforementioned cost of compliance, namely, the gross spread paid by companies to financial institutions for underwriting an IPO. The gross spread reflects the difference between the price at which the underwriters buy shares from the company and the price at which the underwriters sell the shares to the public.

In the United States, gross spreads for small- and moderate-sized IPOs between $25 million and $250 million undertaken by emerging entrepreneurial companies cluster around 7%. By contrast, fees for European IPOs, where offering mechanics are somewhat different from those in the U.S., are considerably cheaper and much more variable; ranging from 1-7% and averaging 4%[1].

The remarkable consistency of IPO pricing in the U.S. has been the subject of scrutiny before, including an investigation by the Department of Justice and a class-action antitrust lawsuit settled in 2007. Nevertheless, U.S. IPO gross spreads are today even more concentrated at the 7% mark than they were in the past, and convergence of IPO methodologies makes comparisons between U.S. IPOs and non-U.S. IPOs more meaningful.

We are concerned that a 7% gross spread represents a significant capital cost to young companies. The median IPO in the U.S. is approximately $100 million in size. The average $7 million gross spread, which does not include legal and accounting fees or other expenses, is a sizable amount relative to the purported cost of initial and ongoing compliance. One study estimates that if U.S. IPOs were accomplished at European gross spread levels, entrepreneurial U.S. companies could save over $1 billion per year.

We are justifiably proud and supportive of U.S. capital markets and their ability to finance innovative new startups into world-beating companies. It is hard to explain the dramatically different pricing of U.S. and non-U.S. IPOs, so we believe more thorough analysis is required. We therefore request that FINRA and the SEC undertake a study of this issue and, if appropriate, consider remedies to ensure the health of our capital markets and start-up ecosystem.