Study: SEC's IPO review process outdated, creating unnecessary bottlenecks

LAWRENCE — As the hunt for wasteful and counterproductive regulatory programs heats up, a new study by a University of Kansas associate professor of law suggests that the Securities and Exchange Commission's initial public offering review process makes for a promising target. 

Before a company “goes public” — allowing ordinary people to trade its securities — it must file a document with the SEC making disclosures. Under a 90-year-old regulatory custom, no investors may see the filing until the SEC staff has conducted a monthslong, line-by-line review.

As Alex Platt explains, for each filing, SEC staff sends the company a letter, raising dozens of issues and requesting various changes. The company responds in kind, attaching a new version of the filing. Typically, this exchange repeats 4-6 times and adds about five months to the IPO timeline.

In an earlier paper, Platt traced the origins of this comment letter process to the early days of the SEC. In his new research, Platt shows how the conditions that justified review in those early decades have largely vanished, leaving behind a regulatory system that imposes heavy costs while yielding uncertain benefits.

“The whole ecosystem in those early decades was just much weaker,” Platt said. “Everything from the expertise of the companies and their advisers to the sophistication and resources of IPO investors to the litigation companies face for violations — it’s just night and day. 

“Given the institutional vulnerabilities in those early years, it made sense for SEC staff to step in to review every filing; today, this approach is really hard to justify.”

The paper, available on SSRN, is forthcoming in the Berkeley Business Law Journal as part of the annual Institute for Law and Economic Policy Symposium.

According to Platt, the SEC’s review has ballooned over the decades and now imposes costs heavy enough to make companies think twice about going public. 

“A five-month delay can be an eternity,” he said. “Some companies who start the IPO process are withdrawing before finishing it, and some are choosing to skip it altogether.”

Platt proposes streamlining the IPO process so that the SEC makes disclosure rules and enforces violations but leaves the task of scrutinizing and evaluating offerings to the many well-incentivized private market actors in the IPO process.

“It’s a story of unintended consequences,” he said. “The SEC wants more companies to go public and wants to protect investors but has allowed the IPO review process to get out of hand to the point where it’s become unhelpful and counterproductive.”

Ninety years ago, the SEC was like a parent putting training wheels on their toddler’s bike, according to Platt. Today it’s more like that parent continuing to insist on training wheels after the child turns 20.

With new leadership poised to take over the SEC, Platt proposes this may be a good moment to step back and rethink this 90-year-old system. 

“I’m trying to get people talking about the comment letter process and the bottleneck it may be causing,” he said.