Facebook Inc (FB), Microsoft Corporation (MSFT): Is This What Killed the Middle Class?

In a March piece for Quartz, venture capitalist Scott Kupor argues that our growing wealth inequality is partly a result of fewer small IPOs. As an example, while a company like Facebook Inc (NASDAQ:FB) goes public at a $100 billion, only the early investors with the right connections were able to profit off the company’s growth. Kupor contrasts this with Microsoft Corporation (NASDAQ:MSFT), which in 1986 went public at a $500 million valuation and allowed the public to get a piece of its growth into a $200 billion company.

To solve this, Kupor wants the SEC to replace the decimalization that went into affect in 2001 — that is, pricing stocks with penny increments — with the previous fractional system. His reasoning is that the larger price spreads will increase the incentive for banks to trade, research, and sell smaller stocks.

Is Kupor right? Is decimalization to blame for fewer small IPOs and therefore less opportunity for the middle class to reap stock market rewards?

Fewer small IPOs
The fact that there are fewer smaller IPOs is undeniable:

Source: Jay R. Ritter, University of Florida.

However, there are other reasons why a drop-off in small IPOs could have taken place outside of decimalization.

For one, the Sarbanes-Oxley Act of 2002 increased the cost of complying with regulation and hit smaller companies disproportionally. In its own 2006 report, the SEC notes that compliance costs for businesses with less than $100 million in annual revenue were higher than 2.5% of revenue, versus less than 0.1% of revenue for a company making more than $5 billion per year. In 2010, the SEC relaxed the regulations for smaller filers to help reduce this cost burden, but the number of small IPOs still remains low.

This could be because regulation changes have little to do with the smaller number of IPOs. New companies based around software have less need to raise large amounts of capital and can easily scale up with a few smaller investment partners. While even Microsoft Corporation (NASDAQ:MSFT) had little immediate need for its cash, its first line for the use of proceeds at least listed “general corporate purposes, principally working capital, product development, and capital expenditures.” Facebook Inc (NASDAQ:FB), in this new culture, put its first use as “creating a public market for our Class A common stock and thereby enable future access to the public equity markets by us and our employees.”

A broader view
However, even if small IPOs caught on, would it really affect wealth inequality?