[House Report 115-887]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-887
======================================================================
MIDDLE MARKET IPO UNDERWRITING COST ACT
_______
August 3, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 6324]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 6324) to require the Securities and Exchange
Commission to carry out a study of the direct and indirect
underwriting fees, including gross spreads, for mid-sized
initial public offerings, having considered the same, report
favorably thereon with amendments and recommend that the bill
as amended do pass.
The amendments are as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Middle Market IPO Underwriting Cost
Act''.
SEC. 2. STUDY ON IPO FEES.
(a) Study.--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 Commission shall--
(1) consider the direct and indirect costs of an IPO,
including--
(A) fees, such as gross spreads paid to underwriters,
IPO advisors, and other professionals;
(B) compliance with Federal and State securities laws
at the time of the IPO; and
(C) such other IPO-related costs as the Commission
determines appropriate;
(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 Commission
determines is appropriate to analyze IPO pricing practices,
considering--
(A) the number of IPOs;
(B) how costs for IPOs have evolved over time,
including fees paid to 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
underwriting costs;
(E) changes in the costs and availability of
investment research for small- and medium-sized
companies; and
(F) any other consideration the Commission considers
necessary and appropriate.
(b) Report.--Not later than the end of the 360-day period beginning
on the date of the enactment of this Act, the Commission 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 Commission may have.
Amend the title so as to read:
A bill 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.
PURPOSE AND SUMMARY
On July 10, 2018, Representative Jim Himes introduced H.R.
6324, the ``Middle Market IPO Underwriting Cost Act''. H.R.
6324 requires the U.S. Securities and Exchange Commission
(SEC), in consultation with the Financial Industry Regulatory
Authority (FINRA), to study the costs associated with small-
and medium-sized companies to undertake initial public
offerings (``IPOs'') and to report to Congress with its
findings and recommendations.
BACKGROUND AND NEED FOR LEGISLATION
The goal of H.R. 6324 is to better understand the costs
associated with small- and medium-sized companies to undertake
IPOs and become public companies.
When a company decides to sell its securities to the
public, they incur various costs to comply with the
requirements to conduct the IPO, as well as to enhance the
ability for the IPO to price and market successfully. Various
studies have focused on the costs of being a public company,
but recent data may be helpful to better understand the
regulatory and professional services costs of actually
undertaking the IPO and becoming a public company. 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.
For example, companies looking to undertake an IPO often
hire an underwriter to serve as the intermediary between the
company and prospective investors. The underwriter helps
prepare the IPO, to help decide the amount of capital to be
raised and the type of securities to be issued. Additionally,
the underwriter often helps with the company's ``road show''
and other marketing efforts, as well as post-IPO support in the
form of research coverage and preparations for investor
meetings and earnings calls. For these services, an underwriter
typically receives a ``gross spread'' as a form of
compensation, which is the difference between the underwriting
price and the actual price offered to the public. This
compensation covers the underwriter's expenses and fees. The
underwriter, though, generally only receives a fee if the IPO
occurs and ultimately prices, which are far from a certainty
considering that companies sometimes miss its earnings goal,
decide to stay private, or accept an offer to sell.
According to some research, the gross spread for middle-
market IPOs in recent history often has remained flat, whereas
the gross spread for underwriting a larger IPO, where the
company may have greater ability to negotiate for lower fees,
is more likely to be a lesser percentage. This bill will
provide a fuller understanding of such costs and trends by
requiring the SEC to: (1) consider the direct and indirect
costs of an IPO, including fees such as gross spreads paid to
underwriters, IPO advisors, and other professional, costs of
complying with Federal and State securities laws at the time of
the IPO, and other costs the SEC determines are relevant to
undertaking an IPO; (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; and (4) analyze the impact of these costs on
the availability of public securities of small- and medium-
sized companies to retail investors. Further, to better
understand the evolution of costs related to undertaking an
IPO, the SEC must analyze trends in IPOs over a time period the
SEC determines is appropriate and consider: (1) the number of
IPOs; (2) how costs for IPOS have evolved over time, including
fees paid to underwriters, investment advisory firms, and other
professions for services in connection with an IPO--i.e., legal
counsel and accounting; (3) the number of brokers and dealers
active in underwriting IPOs; (4) 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 underwriting costs (which could include services and
risks that must be priced into the underwriting activity); (5)
changes in the costs and availability of investment research
for small- and medium-sized companies; and (6) any other
consideration the SEC considers necessary and appropriate.
The SEC will report to Congress with its findings and
recommendations within 360 days of enactment, and in doing so,
will provide the Congress and market participants a broader
understanding of the regulatory and professional services costs
associated with undertaking an IPO.
HEARINGS
The Committee on Financial Services or the Subcommittee on
Capital Markets, Securities, and Investment held hearings where
Members raised matters relating to H.R. 6324 on November 15,
2016, March 22, 2017, October 4, 2017, November 3, 2017, May
23, 2018 and June 21, 2018.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 11, 2018, and ordered H.R. 6324, as amended, to be
reported favorably to the House by voice vote.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. A
motion by Chairman Hensarling to adopt the amendment in the
nature of substitute was adopted by voice vote. A subsequent
motion by Chairman Hensarling to report the bill, as amended,
favorably to the House was agreed to by a voice vote, a quorum
being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 6324
would direct the SEC to study the costs associated with small-
and medium-sized companies to undertake IPOs and to report to
Congress with its findings and recommendations.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 17, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3555, H.R. 6177,
H.R. 6319, H.R. 6320, H.R. 6321, H.R. 6322, H.R. 6323, and H.R.
6324.
If you wish further details on these estimates, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
Securities and Exchange Commission Legislation
On July 11, the House Committee on Financial Services
ordered eight bills to be reported related to the rules,
regulations, and operations of the Securities and Exchange
Commission (SEC). The bills are:
H.R. 3555, the Exchange Regulatory
Improvement Act, would require the Securities and
Exchange Commission (SEC) to issue regulations
regarding its definition of what constitutes a facility
used by a national securities exchange;
H.R. 6177, the Developing and Empowering our
Aspiring Leaders Act of 2018, would direct the SEC to
conduct a rulemaking to expand what types of asset
acquisitions are considered qualifying investments for
a venture capital fund;
H.R. 6319, the Expanding Investment in Small
Business Act, would require the SEC to conduct a study
on the limitation on the amount of outstanding
securities a closed-end fund may hold from a single
issuer and still be classified as diversified;
H.R. 6320, the Promoting Transparent
Standards for Corporate Insiders Act, would require the
SEC to conduct a study of various proposals to change
agency rules regarding the use of written trading plans
by certain securities traders;
H.R. 6321, the Investment Adviser Regulatory
Flexibility Improvement Act, would require the SEC to
revise the definitions of a small business and small
organization applicable for assessing the effect of the
agency's rulemakings under the Investment Advisers Act
of 1940 on those entities;
H.R. 6322, the Enhancing Multi-Class Share
Disclosures Act, would direct the SEC to issue a rule
requiring securities issuers with multi-class stock
structures to make disclosures regarding the voting
power of certain individuals;
H.R. 6323, the National Senior Investor
Initiative Act of 2018, would direct the SEC to
establish a taskforce to identify challenges that
senior investors face and to report on its findings
every two years; and
H.R. 6324, the Middle Market IPO
Underwriting Cost Act, would direct the SEC to study
the costs associated with small and medium-sized
companies undertaking an initial public offering and to
report on its findings.
Using information from the SEC regarding the costs of
similar activities, CBO estimates that implementing seven of
those bills--H.R. 3555, H.R. 6177, H.R. 6319, H.R. 6320, H.R.
6321, H.R. 6322, and H.R. 6324--would each have a gross cost of
about $1 million for the agency to conduct the required studies
and rulemakings and to issue reports. CBO estimates that
implementing the eighth bill--H.R. 6323--would have a gross
cost of $7 million over the 2019-2023 period for the SEC to
establish and carry out the functions of the taskforce
established under the bill.
However, the SEC is authorized to collect fees sufficient
to offset its annual appropriation; therefore, CBO estimates
that the net effect on discretionary spending of implementing
each of those bills would be negligible, assuming appropriation
actions consistent with that authority. H.R. 6323 also would
require the Government Accountability Office (GAO) to conduct a
study on the economic costs of the financial exploitation of
senior citizens and CBO estimates that implementing that
section would cost GAO less than $500,000; such spending would
be subject to the availability of appropriated funds.
None of the bills would affect direct spending or revenues;
therefore, pay-as-you-go procedures do not apply for any of the
eight bills.
None of the bills would increase net direct spending or on-
budget deficits in any of the four consecutive 10-year periods
beginning in 2029, CBO estimates.
None of the bills contain intergovernmental mandates as
defined in the Unfunded Mandate Reform Act (UMRA) and would not
affect the budgets of state, local, or tribal governments. All
of them would require the SEC to take actions that could raise
the agency's administrative costs and the fees it collects to
offset those costs. If the SEC increased fees, it would
increase the cost of an existing mandate on private entities
required to pay those fees. CBO estimates that none of the
bills would increase fees in an amount that would exceed the
annual threshold for private-sector mandates established in
UMRA ($160 million in 2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section cites H.R. 6324 as the ``Middle Market IPO
Underwriting Cost Act.''
Section 2. Study on IPO fees
This section directs the SEC in consultation with the FINRA
to carry out a study on the costs associated with small- and
medium- sized companies that are conducting an IPO and to
report to Congress with its findings and recommendations.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows: H.R. 6324 does not
repeal or amend any section of a statute. Therefore, the Office
of Legislative Counsel did not prepare the report contemplated
by Clause 3(e)(1)(B) of rule XIII of the House of
Representatives.
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