Fighting The Sarbox Monster

There is an excellent editorial in today's Wall Street Journal by Robert Grady of Carlyle.  The Sarbox Monster provides a well organized list of reasons why the IPO market remains largely unreachable the the downstream cost to the U.S. in terms of job creation and innovation.  The article is light on recommendations, but puts the problem is a constructive context.  I view the article as a sign of a more receptive climate to Sarbox reform and other regulatory changes to correct prior political short-sightedness.  Bob reminds us that essentially all of the value creation from venture has occurred through the growth of companies after an IPO.  Fortunately, public market buyers can remember that these winners outweighed the losers, even after the bubble, as evidenced by recent buying of smaller technology IPOs.  It appears that both politicians and buyers may be finally positioned to facilitate positive changes.

Sarbox reform will be necessary as a first step to get companies public, but it will not solve the underlying problem of providing research for small cap stocks. The best solution I've seen is the National Research Exchange (NRE) www.ResearchExchange.com.  Founded by Wall Street veteran David Weild IV, the NRE is working on ways to pay for ongoing research coverage. The basic idea is to carve out a portion of the 7% underwriting fee and put it into an escrow account to pay for research over the first two or three years.  The pool could be used to attract research from firms outside of the main underwriting group.  If an analyst left an investment bank and coverage was dropped, the remaining money in escrow could be used to find another firm to cover the stock.  There would be no promise on recommendation, to avoid the obvious potential conflict.  While NRE is still in process of structuring and rolling out the service, I like the idea of effectively guaranteeing coverage by spreading out the economics.