Obama’s small-business proposal would help high-growth start-ups, experts say

But going public has become expensive, costing about $2.5 million on average for the initial regulatory compliance and several million each year afterward, according to the IPO Task Force, a group of investors and entrepreneurs that presented to the Treasury Department last fall.

Experts say one way to ease the financial burden of going public is to scale back Sarbanes-Oxley, the 2002 financial accounting law, for small companies only. Born out of Enron and other corporate scandals, the law comes with significant transparency and auditing requirements for public companies.

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“Sarbanes-Oxley was passed to address a big-company problem,” said Maeder said. “The law has made it so hard for small companies to go public, they’ve been denied access to growth.”

Obama’s proposal would change how Sarbanes-Oxley and other rules are phased in during the initial years following an IPO, which could also potentially lower the barriers to going public for young companies. It also calls for raising the limit on public offerings from $5 million to $50 million for companies that are exempt from SEC registration requirements under Regulation A, in effect opening up the market for more small IPOs.

“We have to give these entrepreneurs every incentive to succeed and grow their companies here,” said SBA Administrator Karen Mills in a conference call with reporters following Tuesday’s announcement. “This will streamline paperwork for companies trying to raise capital.”

Of course, there are downsides to this IPO free-for-all. Sarbanes-Oxley and other SEC requirements are intended to protect investors from sham deals, and “some believe that allowing a company to raise $50 million without the proper audited financial statements and other disclosures could be bad for investors,” said Laura Oppenheimer, a senior policy adviser with Third Way. “Likewise, allowing average Joes on sites like Kickstarter to invest their money in a business without the proper information could be a magnet for fraud.”

Some venture capitalists argue that in order to prepare for IPOs, mid-size companies also need more coverage from analysts — the researchers who provide information about a company so that investors feel more comfortable buying into it. Certain regulations make it less lucrative for analysts to cover start-ups, and the Startup America legislative package doesn’t do anything to change that.

“When the U.S. economy has been healthiest, it’s when there has been a productive IPO market,” said Matthew Howard of Norwest Venture Partners. “If there were more analyst coverage, we would know more about these companies, so there would be more IPOs.”

Making it easier to invest

The new proposal does feature small-business tax deductions for equipment expenses and a 10-percent credit for companies that increase jobs or wages stateside, which follow on the “17 and counting” small-business tax credits Obama touts having signed into law.

“For the small business that is unsure about whether to accelerate hiring, this 10 percent wage credit provides as an incentive for them to take the next step,” said Gene Sperling, director of the White House National Economic Council.

Some economists dispute the idea that tax cuts incentivize hiring, however. Entrepreneurs start firms or increase hiring when they see opportunities in the market, not when they see a marginal savings on their tax bill, said Antoinette Schoar, a professor of entrepreneurial finance at the Massachusetts Institute of Technology’s Sloan School of Management.

Even research from developing countries, where some governments pay entrepreneurs to hire, show that such efforts don’t often yield employment boosts, she said.

Many of the venture experts said the more important break in Tuesday’s proposal is the renewal of the capital gains tax exemption for small business stock, which was 100 percent until January 1 of this year. Maeder said a capital gains reduction is important for two reasons: One, it gives individuals an incentive to invest and grow other companies. And two, it helps venture capital firms attract top talent that might otherwise go to hedge funds and other high-paying finance fields.

“Hedge funds give giant bonuses,” Maeder said. “All I can do is say, if you work hard here, you’ll become a partner. When companies go public 15 years from now, you’ll get some of the distribution of the stock. I need that differential in order to attract talent in order to help start the next great companies.’”