The increasing regulatory burden on public companies is causing deleterious effects. Corporate finance has become more of an art than a reporting of objective facts, and the cost of navigating the SEC's and FASB's rulings has become prohibitive, except for multibillion-revenue companies. Instead of putting capital and manpower to use in product development and competitive hiring, companies are forced into navigating a draconian regulatory system that does more harm than good.
Due to the extremely high cost of going public, companies are choosing to stay private longer. The American Bar Association concluded that "the average cost of completing an IPO has been estimated to be approximately $4 million, on top of an average one-time fee of $1 million to prepare the organization to become a public company and the recurring average $1.5 million annually to comply with ongoing regulations."
A study by Goldman Sachs (via Markets Insider) suggests that companies should simply skip IPOs and stay private. The report notes that "with the formation of mega-funds like Softbank's $100bn Vision Fund, record levels of dry powder in other funds, and continued strength in VC fundraising ... investors and management teams increasingly prefer to exit via later-stage funding rounds given greater scrutiny over public financial disclosures and uncertainty around relative availability of growth capital post-IPO."
The recent WeWork debacle is a perfect example. WeWork raised money at a $47 billion valuation prior to going public. Uber was even higher. Problems surfaced when they released their documents to the public. Sophisticated analysts poked holes in their records and revenue models, resulting in a loss of confidence and trust. In the private market, these documents were only available to venture investors who get paid by putting billions of other peoples' money to work. Such early investors have an incentive to spike valuations so that their position in early rounds show dramatic positive returns on paper.
As is true with most regulations, securities regulations result in obfuscated information available to the public, yielding unintended consequences. Having companies go public allows everyone to scrutinize them. However, because of prohibitive costs, company information stays opaque and incentivizes the wrong kind of behavior.
The free market, true to its nature, has solved these problems with blockchain technology. A blockchain is an immutable distributed ledger that allows every single transaction to be viewed. Imagine perfect transparency for the unicorns: a dramatic reset in valuation would be unlikely if all of the company's finances were transparent from the outset and potential investors scrutinized their viability. Balloon spikes would happen much less frequently, and all constituents would be better served.
Blockchain can usher in a new era of financial transparency and reward the best behavior. Valuations can be placed explicitly on the company's ability to responsibly manage assets, debt and equity, giving investors a trustable look into a company's health. Transparency is, by far, the best regulator. It optimizes prices and the quality of goods and services, and it requires management to report its activities under the watchful eye of the public.
Indeed, blockchain and cryptocurrency markets are giving us windows into a world in which transparency, not regulation, will better serve us all. Solutions like security tokens are rooted in transparency, and there is a discussion about them replacing shares of stock. A security token would represent an ownership share in a company, piece of real estate, art or other asset. The token would be recorded on a blockchain, and all transactions regarding the underlying asset would be 100% transparent for any participant to view.
Compare this to the language used in S-1s and other regulatory documents. GAAP accounting is a knotty maze, and unless you are a forensic accountant, is virtually impossible to understand. Reporting under regulatory scrutiny has become the opposite of transparency and does not serve the public whatsoever.
In a blockchain world, companies would compete to be more and more transparent. The more transparency, the more investors and other constituents will trust the security or utility token. When the SEC or other regulatory bodies are involved, investors become complacent and assume the regulators are actually working on behalf of the public.
Even though old habits die hard, we're already seeing Asian Tigers adopt blockchain mentalities in their future plans. However, the western mindset may take longer to adjust. Established leaders need to buy in, and the market benefits of transparency need to be more widely appreciated. Knowledge among IT pros and a wide variety of consumer applications that are usable, trustworthy and can easily blend into our daily habits will also push us forward.
Blockchain providers should make sure their blockchains are well maintained with a search function that allows any participant to view every transaction. This level of transparency drives value and should help move greater blockchain adoption forward. For example, in the context of agriculture, it could be more desirable to get your supply from a company that uses blockchain technology because every single transaction related to the exchange of a particular crop is visible to the consumer. This applies to any context that involves the flow of goods and services, including finance, at issue here.
We are on our way. The competition and winner's mentality is thoroughly ingrained in our culture. I firmly believe that we'll start to see the wave of change take over in the new decade. Considering our history of competition for intelligence and capital, I see few other courses for the growing future of the U.S.
This article was originally published in Forbes on February 14, 2020
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The opinions expressed here are the author's views and do not necessarily represent the views of MediaVillage.com/MyersBizNet.