How over-regulation is shackling the next Facebook

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John Berlau
Senior Fellow, CEI
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      John Berlau

      John Berlau is director of the Center for Investors and Entrepreneurs at <a href="http://cei.org/">CEI</a>. He is also a contributor to OpenMarket.org. Berlau has written about the impact of public policy on entrepreneurship for many publications including The Wall Street Journal, Barron's, Investor's Business Daily, and National Review. He has been the guest on many radio and television programs including MSNBC's "The Situation" with Tucker Carlson and CNBC's "Street Signs" with Ron Insana, and the Your World with Neil Cavuto on Fox News.

      Berlau previously was Washington correspondent for Investor's Business Daily and a staff writer for Insight magazine, published by The Washington Times. In 2002, he recevied Sandy Hume Memorial Award for Excellence in Political Journalism from Washington's National Press Club . He was a media fellow at the Hoover Institution in 2003. Berlau graduated from the University of Missouri-Columbia in 1994 with degrees in journalism and economics. He is the author of the book Eco-Freaks (Nelson Current, 2006), which has been in Amazon's top 100 best-selling non-fiction books.

The decline has been especially severe among small firms. Even Obama’s Council on Jobs and Competitiveness has noted that “the share of IPOs that were smaller [in market capitalization] than $50 million fell from 80 percent in the 1990s to 20 percent in the 2000s.” In fact, in addition to Facebook, which had a $104 billion market capitalization on the eve of its IPO, LinkedIn, Zynga, and Pandora all had market capitalizations that exceeded $1 billion when they went public.

But there is some good news. Since the slightly deregulatory Jumpstart Our Business Startups (JOBS) Act passed Congress and was signed by President Obama in early April — after much stalling from statist liberals in the Democratic-controlled Senate — there has been a trickle of smaller firms returning to the IPO market. Among other things, the JOBS Act creates a five-year “on-ramp” for most firms going public in which they are exempt from the Sarbanes-Oxley internal control mandates, the Dodd-Frank proxy provisions, and other burdensome regulations.

Despite Obama’s signature, the JOBS Act has been bashed by the usual suspects to whom regulation is religion — i.e., The New York Times editorial page and Rolling Stone’s Matt Taibbi — as somehow benefiting giant corporations and the “big banks.” But the data shows the first firms taking advantage of this law are the small, growing firms that supporters of the law had pointed to as beneficiaries. ClearSign Combustion, a Seattle-based firm that makes energy-efficient furnaces, launched an IPO with a market cap of just $12 million and cited the JOBS Act as allowing it to do that.

This is good news, because every dollar a smaller firm can raise by going public is one less dollar that firm has to beg and grovel for from a bank. This extra cash can be used to expand the business faster and hire more employees. As the Obama jobs council and others have noted, 90 percent of a public company’s job creation occurs after it goes public.

For ordinary investors, small-cap stocks are high risk but potentially high return. Ordinary investors should be able to invest in them. Right now they often can’t, thanks to burdensome regulations that are ironically designed to rein in the “big guys.”

Facebook’s stock market launch should be celebrated, but the mini-IPOs enabled by the JOBS Act are the wave of our entrepreneurial future.

John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute.