[Congressional Record Volume 169, Number 97 (Monday, June 5, 2023)]
[House]
[Pages H2729-H2731]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
MIDDLE MARKET IPO COST ACT
Mrs. WAGNER. Mr. Speaker, I move to suspend the rules and pass the
bill (H.R. 2812) to require the Securities and Exchange Commission to
carry out a study of the costs associated with small- and medium-sized
companies to undertake initial public offerings, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 2812
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Middle Market IPO Cost
Act''.
SEC. 2. STUDY ON IPO FEES.
(a) Study.--The Comptroller General of the United States,
in consultation with the Securities and Exchange Commission,
in consultation with the Financial Industry Regulatory
Authority, shall carry out a study of the costs associated
with small- and medium-sized companies to undertake initial
public offerings (``IPOs''). In carrying out such study, the
Comptroller General shall--
(1) consider the direct and indirect costs of an IPO,
including--
(A) fees of accountants, underwriters, and any other
outside advisors with respect to the IPO;
(B) compliance with Federal and State securities laws at
the time of the IPO; and
(C) such other IPO-related costs as the Comptroller General
may consider;
(2) compare and analyze the costs of an IPO with the costs
of obtaining alternative sources of financing and of
liquidity;
(3) consider the impact of such costs on capital formation;
(4) analyze the impact of these costs on the availability
of public securities of small- and medium-sized companies to
retail investors; and
(5) analyze trends in IPOs over a time period the
Comptroller General determines is appropriate to analyze IPO
pricing practices, considering--
(A) the number of IPOs;
(B) how costs for IPOs have evolved over time for
underwriters, investment advisory firms, and other
professions for services in connection with an IPO;
(C) the number of brokers and dealers active in
underwriting IPOs;
(D) the different types of services that underwriters and
related persons provide before and after a small- or medium-
sized company IPO and the factors impacting IPOs costs;
(E) changes in the costs and availability of investment
research for small- and medium-sized companies; and
(F) the impacts of litigation and its costs on being a
public company.
(b) Report.--Not later than the end of the 360-day period
beginning on the date of the enactment of this Act, the
Comptroller General shall issue a report to the Congress
containing all findings and determinations made in carrying
out the study required under subsection (a) and any
administrative or legislative recommendations the Comptroller
General may have.
The SPEAKER pro tempore. Pursuant to the rule, the gentlewoman from
Missouri (Mrs. Wagner) and the gentleman from California (Mr. Sherman)
each will control 20 minutes.
The Chair recognizes the gentlewoman from Missouri.
General Leave
Mrs. WAGNER. Mr. Speaker, I ask unanimous consent that all Members
may have 5 legislative days in which to revise and extend their remarks
and include extraneous material on this bill.
The SPEAKER pro tempore. Is there objection to the request of the
gentlewoman from Missouri?
There was no objection.
Mrs. WAGNER. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in support of H.R. 2812, the Middle Market IPO
Underwriting Cost Act. I thank my colleagues from both sides of the
aisle, Representatives Himes and Lawler, for working on this important
piece of bipartisan legislation that will help ensure that our IPO
market remains competitive and attractive, especially for small- and
medium-sized companies.
I thank Mr. Himes for his willingness to work with the majority, and
specifically Congressman French Hill of Arkansas, to reach an agreement
on this legislation.
Staff have been working on this since the bill was marked up in
April, and I am happy to see that the study will now be carried out by
the GAO in consultation with the SEC and FINRA.
Companies have two ways of accessing capital in the securities
markets to fund their operations: an initial public offering, IPO,
where they sell securities publicly through a registered offering with
the SEC, or a private offering under an exemption from registration.
Accessing capital through an IPO is a significant step for a company
because there are considerable up-front costs, as well as ongoing,
increased costs associated with the company's reporting requirements as
a public company.
Before an IPO, companies often spend tens of millions of dollars
gathering and compiling mandatory information to submit to the SEC and
make available to the public for the sale of its securities.
The SEC itself has estimated that the average cost of just achieving
regulatory compliance for going public is $2.5 million, which may not
include additional costs of hiring professionals to help undertake the
IPO.
However, additional data is required to achieve a better
understanding of the costs of the added regulatory and
[[Page H2730]]
professional services associated with undertaking an IPO and becoming a
public company.
As a result, the study required under this bill will help Congress
and the market better understand the costs associated with small- and
medium-sized companies to undertake initial public offerings, IPOs, and
become public companies.
Mr. Speaker, H.R. 2812 is a balanced and thoughtful bill that will
give us the information to better understand those costs with going
public so that Congress can continue the work to make our public
markets the most attractive and competitive in the world.
Mr. Speaker, for this reason, I urge my colleagues to support H.R.
2812, and I reserve the balance of my time.
Mr. SHERMAN. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in support of H.R. 2812, the middle market IPO
underwriting study act, sponsored by the gentleman from Connecticut
(Mr. Himes), and I commend him for his work in bringing this bill to
the floor and authoring it.
This bill passed our committee by a voice vote. I don't think there
was a dissenting voice in the room.
As the gentlewoman from Missouri points out, the process of going
public and filing a registration statement is expensive. Due to that
expense, companies may choose not to go public and not raise the money
they need to expand their businesses and provide additional employment
to aid our economy. Therefore, it is in all of our interests to see
whether that cost can be reduced.
Companies in this process usually engage an underwriter or broker-
dealer to help them sell the shares to prospective investors.
Underwriters are typically compensated for their services through fees
such as underwriting spreads and underwriting fees.
The underwriting spread is the difference between the price at which
the underwriter buys the security from the issuer and the price at
which those securities are sold to the public in the public offering.
{time} 1730
The underwriting fee, which often constitutes the largest share of
the cost of doing an IPO, or initial public offering, is typically a
percentage of the gross proceeds of the sale of the securities. The
exact amount varies and can be negotiated between the issuer and the
underwriter. Large companies have, in recent years, been able to
negotiate lower percentages for this process, which reduces their
overall fee. At the same time, smaller companies have continued to pay
the same historic percentage for this service, which is often 7 percent
of the transaction.
Higher underwriting fees essentially increase the cost of raising
capital, allowing middlemen to pocket profits that would otherwise be
available to grow the company.
Despite technological advancements, such as digital platforms which
now allow for a quicker and wider distribution of securities,
underwriting costs for small-and medium-sized companies have remained
stagnant and uncompetitive.
The gentleman from Connecticut (Mr. Himes) has brought forward a bill
to direct a study of this problem and offer concrete solutions. It will
focus on the underwriting fee. It will also look at the auditing fee,
as well.
I support this bill, which will shed light on how much small- and
medium-sized companies are paying chiefly for underwriting services
when they go public. I hope this will get the SEC to address this
behavior on Wall Street.
Mr. Speaker, I urge my colleagues to support the bill, and I reserve
the balance of my time.
Mrs. WAGNER. Mr. Speaker, I reserve the balance of my time.
Mr. SHERMAN. Mr. Speaker, I yield such time as he may consume to the
gentleman from Connecticut (Mr. Himes), the author of this bill.
Mr. HIMES. Mr. Speaker, I thank the gentleman from California and my
friend from Missouri, and I rise in support of this bill, H.R. 2812,
the middle market IPO underwriting cost act.
I thank Chairman McHenry and Ranking Member Waters for considering
these bills on the floor today, and this bill in particular, which we
have been working on for a very long time.
This bill, H.R. 2812, grows out of the work that the Financial
Services Committee has been doing for a long time around the JOBS Act,
which did good work to reduce the cost and friction associated with a
young company going public. At the time, the JOBS Act was estimated to
save companies between $1 million and $2 million a year when and after
they go public, but the actual cost of going public, except for the
very largest companies, as the gentleman from California noted, has not
changed at all in many, many years.
Over those years, middle-market companies, which arguably have less
negotiating power than some of the very large companies that have been
able to force down fees, have experienced a perfectly consistent gross
spread of 7 percent. Think about that. The price of going public has
never varied from 7 percent. That means that a young company raising a
typical $200 million in capital, with a 7 percent gross spread, hands
over $14 million to the underwriters. That is a lot of money for a
young company.
From 2001 to 2022, 95 percent of U.S. IPOs that raised between $30
million and $130 million had a gross spread of 7 percent. From 1992 to
2017, more than 80 percent of middle-market IPOs had gross spreads of
exactly 7 percent.
The cost of the technologies used during the underwriting process
have come down dramatically over the decades, but the gross spread has
not, so I strongly believe that this remarkably stable 7 percent gross
spread is fair subject for scrutiny.
H.R. 2812 very simply asks the GAO, in consultation with the
Securities and Exchange Commission, to examine the gross spread and
other costs associated with going public to see if we can understand
that remarkable stability, what drives it, and what might be done to
try to make the market more competitive and, therefore, reduce costs
for companies trying to access our capital markets.
Mr. Speaker, I again thank Chairman McHenry and Ranking Member Waters
for bringing this bill to the floor today.
Finally, Mr. Speaker, I thank my good friend from Arkansas,
Representative French Hill, for all of his thoughtful feedback and
suggestions on this bill over the last few weeks.
Mr. Speaker, I urge my colleagues to support H.R. 2812, and I again
thank the gentlewoman from Missouri (Mrs. Wagner) and the gentleman
from California (Mr. Sherman).
Mrs. WAGNER. Mr. Speaker, I reserve the balance of my time.
Mr. SHERMAN. Mr. Speaker, I think the gentleman from Connecticut said
it well: Costs should be coming down because technology is available,
yet they seem exactly stuck at a noncompetitive 7 percent. Our
investors in companies need more robust competition and fairer
underwriting practices. This bill would shed light on these practices
and help us strengthen competition in underwriting services for our
smaller and medium-sized companies.
Mr. Speaker, I urge my colleagues to support this bill, which passed,
I believe, on a voice vote in our committee. I know of no opposition.
Mr. Speaker, I yield back the balance of my time.
Mrs. WAGNER. Mr. Speaker, I strongly urge my colleagues to support
H.R. 2812, and I yield back the balance of my time.
Ms. JACKSON LEE. Mr. Speaker, I rise today in support of H.R. 2812,
the Middle Market IPO Cost Act.
H.R. 2812 would require the Securities and Exchange Commission to
study and report on the costs encountered by small- and medium-sized
companies when undertaking initial public offerings and certain
offerings exempt from securities registration requirements.
The report commissioned through this bill will provide information to
facilitate cost reduction for small and medium-size businesses when
they conduct an initial public offering and ``go public.''
This bill constitutes an important step toward protecting small and
mid-size businesses from the penalties they currently face under
historic fee structures and restrictions on IPO funding.
The Houston area leads the Nation in small business development and
is one of the top emerging ecosystems for startups globally.
In 2021, over 150,000 new-business applications were filed in the
Houston area.
This bill will boost these Houston businesses by making it easier for
them to grow and create jobs.
By going public, businesses in Houston and beyond will be able to
give American families the opportunity to invest directly in their
businesses and build wealth for the future.
Mr. Speaker, I stand for American families. I stand for economic
growth and small businesses. This bill will equip Congress to better
[[Page H2731]]
understand and address the burdens and costs of conducting an initial
public offering.
I urge my colleagues to join me in supporting this bill and in
working to ensure accessible economic opportunities for all.
The SPEAKER pro tempore. The question is on the motion offered by the
gentlewoman from Missouri (Mrs. Wagner) that the House suspend the
rules and pass the bill, H.R. 2812, as amended.
The question was taken.
The SPEAKER pro tempore. In the opinion of the Chair, two-thirds
being in the affirmative, the ayes have it.
Mrs. WAGNER. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further
proceedings on this motion will be postponed.
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