NVCA Wants to Broaden Big Four to Global Six

The National Venture Capital Association (NVCA) has come up with four key recommendations to help US venture-backed companies, to kick start the IPO market, which decreased in 2008 to only 6 IPOs in the United States. Taking recommendations from capital market leaders, the NVCA focuses on the venture capital industry, investment banking, accounting professions, law firms, stock exchanges and the government to to restore a vibrant IPO environment once the economy comes back.

Recognizing that today’s market environment is challenging especially for small cap IPOs, due to the high costs of going public, the constituents involved in the process, and the restrictions placed on potential public companies. To fix these issues, the NVCA has come up its “Four Pillar Plan” to restore the Venture-Backed IPO Market. We want to discuss the first pillar in detail as it deals specifically with the Big4 accounting firms.

But first pillars 2 to 4 in brief:

Pillar II: Enhanced Liquidity Paths
Since the distribution system connecting sellers and buyers of venture-backed company new issues is broken, the NVCA endorses concepts such as Inside Venture, Portal Alliance (NASDAQ), SecondMarket and Xchange., where “cross-over investors” commit to hold stock for the long term. Another point of interest, the NVCA will help raise awareness about proactive M&A roll up strategies of smaller portfolio companies to achieve IPO critical mass and global alternatives to the U.S. public markets.

Pillar III: Tax Incentives
The U.S. government must maintain tax policies to encourage VC investment to stimulate the pipeline of promising IPOs, further, Congress should consider adopting new tax incentives which would stimulate IPOs, at least in the short term.

Pillar IV: Regulatory Review
The NVCA will advocate for a full systematic review by the SEC of recent regulations which impact small cap companies, including interpretations of SOX, pre-IPO financial reporting requirements, the separation of analyst and investment banking functions, and private placement requirements, since recent sweeping financial regulations have created unintended consequences for small pre-public and public companies.

Finally, Pillar I: Ecosystem Partners

Here’s the exact language from the NVCA press release” Within the last decade, venture-backed companies have been faced with fewer choices as it relates to investment banks and accounting firms that will assist in the IPO process. While the major investment banks continue to operate, the “four horsemen” boutique investment banks of the 1990’s (Alex Brown, Hambrecht & Quist, Montgomery Securities, and Robertson Stephens), which specialized in IPOs of venture-backed companies, no longer exist. Further, the fall of Arthur Andersen and the resulting pressure placed on the Big Four accounting firms has, in many markets, left a void in terms of quality auditing services available for these smaller companies.

Against this backdrop, the NVCA believes that the venture capital industry must do more
to promote alternative ecosystem partners while engaging with existing members to
identify ways to better serve the needs of emerging growth companies. The Association
has begun to engage in talks with boutique and major investment banks as well as the Big
Four and other public accounting firms about how they can also better serve the needs of
small cap companies. The NVCA also intends to encourage the use of a broader array of
service providers such as the “Global Six” including Deloitte LLP, Ernst & Young LLP,
Grant Thornton LLP, KPMG LLP, PricewaterhouseCoopers LLP and BDO Seidman LLP.”

Our take on this Pillar:

The fall of Andersen has certainly reduced the choice for all public companies, and much more so for smaller companies. Earlier, companies could choose from one of five global auditing firms, leaving ample choice among the remaining four for tax and advisory consultants. Andersen’s demise and Sarbox has drastically cut down both these avenues for larger companies, and as the Big4 firms have grown dramatically over the past few years, they have gravitated away from smaller companies, not always by choice.

The NVCA points out that out of 21 IPOs from November 2007 to February 2009, Big4 firms were involved in 16 and non-Big4 firms were involved in 5 of these IPOs. So, the
NVCA wants to increase the population of global accounting firms to include Grant Thornton and BDO Seidman and call it the new moniker “The Global Six”. While this does increase the sheer number of providers, the Big4 firms are huge compared to GT and BDO, and there is inherent inertia among VC firms to select name-brand firms to (hopefully) maximize their outcome from the IPO. Despite all good intentions and eventual efficient outcome, we think it will be a while before the Big Four move to the Global Six.

The NVCA “intends to encourage the use of a broader array of service providers” – we applaud this, but is a tough challenge to change public perceptions, and we’ll be watching if they do succeed in this effort.

Of course, there are many views on this, some quite opposite ours, and we welcome comments from our readers – what have you experienced? where do you think this is headed?