In an attempt to avoid the twin demons of high-stakes litigation and excessive taxation and regulation, a swelling wave of companies is heading overseas to raise needed capital, threatening the nation’s financial pre-eminence and raising new concerns about the economy’s ability to grow. Congressional action, in the form of Sarbanes-Oxley and other hyper-restrictive laws, and lawmakers’ inaction on tort reform and corporate tax relief are largely to blame for the deterioration of the U.S. public equity markets.
In its December 2007 report, the Committee on Capital Markets Regulation provided mountains of data pointing to one conclusion: The number of initial public offerings is exploding in foreign countries but remains flat in the U.S. A higher percentage of foreign companies are also leaving the New York Stock Exchange even as a small but growing number of American firms have been listing only on foreign exchanges.
Venture capitalists have complained for years that it’s become too expensive to do business in the U.S. So it’s not surprising that many are seeking more accommodating venues overseas. At 35 percent, the U.S. corporate income tax rate is the highest since World War II. Many of our global competitors take a much smaller tax bite, and a few don’t tax corporate profits at all.
Meanwhile, U.S. corporations are sitting on more than $3 trillion of “locked-in” assets because the domestic tax structure makes selling them a bad idea. Regulatory burdens — estimated by National Association of Manufacturers head John Engler to add 20 percent to the cost of goods made in America — and the continuing plague of class-action lawsuits also create huge disincentives to invest in promising but risky new ventures.
The overall impact of the “difficult IPO environment,” California venture capitalist Rich Helfrich told The Examiner, is that fewer startups, especially in the technology sector, get the capital they need here, so they go elsewhere.
And with fewer startups, our ability tocompete internationally and create good jobs at home is diminished. Despite billions of dollars spent on research and development at the university level, Helfrich added, most government-funded R&D “lands up as a report on a shelf” because large institutional investors such as pension funds consider it too risky to invest in emerging companies.
Three years ago, when Helfrich testified before Congress, he urged that small companies be exempted from stifling regulations and that tax credits be provided for “angel investors” willing to take a chance on technology startups, whose capital requirements often exceed the cost of labor. But Congress did nothing, and the IPO exodus continues — perhaps taking the next Microsoft with it.