Did you get that email from Robinhood too? Users of the most popular retail trading app seem to be finally getting access to IPOs before they’re listed on the markets. That would’ve been useful like a month ago when Coinbase went public... but we digress.
A growing number of retail traders being introduced into the markets within the last year has also coincided with a lot of businesses being taken public. With the popularity of SPACs on the rise and the SEC's direct listing option, companies are being presented with more flexible routes to public funding.
We’re starting to see lower barriers to entry for public markets, and for some analysts, this is begging the question: is it too easy to go public?
We need some perspective and data on this
- The US hit its peak for most publicly traded companies all the way back in 1996 when there were about 8,000 companies trading.
- Logically assuming that the number of public companies would slowly increase over time, you’d be surprised to find out there are far fewer now than before: about 6,000 between the NYSE and the NASDAQ.
- Despite this long-term decline, the number of IPOs in 2020 more than doubled from 232 the year prior to 480. That represents the highest number since 2020 when 397 companies went public.
- And in 2021? 485 companies already went public, putting us on pace for an annualized total of about… 1,200. SPACs have taken up a sizable 70% of these public offerings so far this year.
So let’s establish this: we’re not exactly overrun with stocks on the exchanges historically speaking, but over the last year and a half, the number of IPOs has skyrocketed relative to the last two decades, and this is where the concern is stemming from.
The real debate may be around IPO criteria
As the data bears out for us, we don’t exactly just have a massive glut of companies listed on the markets. If anything, restrictions have gotten tighter and regulatory agencies stricter over time. The real topic here may be that some investors disagree with some of the less conventional ways of going public that have facilitated this recent boom.
Although SPACs have been around since the 90s, they’ve really picked up steam over the last couple of years. Investors and analysts are increasingly becoming skeptical about the management teams behind some of these prototypical shell companies given their structure, and expressing concern over consistently poor returns for everyday investors who are usually caught holding the bag.
On top of this, some are wary of what’s called a direct listing in which outstanding shares are sold without underwriters. Such listings allow existing shares to be sold directly to the public instead of issuing new ones. Because of this, direct listings now give retail investors access to finally participate in public offerings.
Recall that in a traditional IPO, new shares are created and underwritten. Underwriters are intermediaries, typically investment banks, that facilitate the listing, distribution and pricing of newly issued shares for a chunky fee.
So at the end of the day...
By removing certain barriers to the traditional IPO process thereby allowing lesser-qualified businesses to become publicly traded, we would expect to see more volatility in newly minted public companies.
Retail investors like us have no control over what companies go public or why they qualify to do so. So, what do you do? Use our best judgment if we plan to partake in the party. Learn, research, and invest wisely.