It’s clear now that Uber Technologies Inc.’s initial public offering will be left with a less than five-star review. The stock remains below its IPO price, and many people have heaped fault on the bankers who told executives that Uber could be worth $120 billion. Nonetheless, according to a Bloomberg News article, Michael Grimes, Morgan Stanley’s top Silicon Valley banker who led the deal, isn’t experiencing a drop-off in demand for his services. That could be because the real hazard that set the Uber IPO on a crash course — long before Grimes began moonlighting as a driver to win the company’s business — is a little-talked-about seven-year-old rule change that more than quadrupled the effective limit on the number of investors a company can have before its IPO. Given Uber’s weak start, and the potential for others, it’s time for lawmakers and regulators to revisit that change. Raising the private market investor cap was a provision in the 2012 JOBS Act, which despite the acronym had little to do with creating jobs. More directly, the act made it easier for startups to raise money and relaxed some rules for going public. But its most lasting impact lifted the number of shareholders a private company could have to 2,000 from 500 before it had to start publicly disclosing its finances and quarterly results. Facebook’s Sheryl Sandberg, still an unblemished star at the time, argued that the 500-investor limit was forcing the social media giant to go public before it was ready and would soon be disruptive for other disruptors. The flop of the company’s IPO later that year seemed to prove her point. Ultimately, the JOBS Act allowed companies to stay private much longer than they would have in the past. Until recently at least, that has been a big boon to Uber, Lyft Inc., Airbnb Inc., WeWork Companies Inc. and other so-called tech unicorns, which have been able to raise buckets of cash and keep their finances largely out of public view and scrutiny. For investors, the data is mixed. Jay Ritter, a finance professor at the University of Florida, says that from 2001 to 2011, IPOs did slightly better than the market in their first three years, or about 1.3 percentage points. After 2012, they have done slightly worse, by about 1.8 percentage points. First-day IPO returns from 2012 through the end of 2017 were 17%, compared with 12% for 2001-2011, but the former period doesn’t include any market busts. Ritter says he’s not convinced the JOBS Act has materially hurt the IPO market. Nonetheless, the Uber IPO offered some more evidence that the increase in pre-IPO shareholders may be hurting returns for average investors. Both the Wall Street Journal and the the New York Times have reported that part of what stalled the IPO was that BlackRock and other institutional investors that normally buy IPO shares were already Uber investors and didn’t want any more. That dried up the normal demand for IPO shares and hurt the Uber offering. It’s not clear that Uber had more than 500 investors before its IPO, but it’s likely. The startup tracking website Crunchbase put the number of pre-IPO Uber investors at 98. But that doesn’t include the company’s earliest investors, nor any of its 22,000 employees, or former employees or contractors, many of whom surely received shares. What’s also true is that BlackRock and others were investors in IPOs even before the JOBS Act, but the rule change has made it easier for mutual funds companies and other nontraditional venture capital firms to invest in private companies, so more money is chasing companies like Uber at earlier and earlier stages. You can’t blame retail investors if they start to feel left out. The good news, perhaps, is that the Securities and Exchange Commission is already on this issue. From Chairman Jay Clayton’s first speech, he has harped on the problem of more and more companies staying private. He seems concerned that if investing returns shift away from public markets, then investors will lose interest in the U.S. stock market. And that would be problematic because robust stock markets have been a hallmark of vibrant economies. I have been skeptical of this concern. Most successful large companies go public at some point. And there can’t be private market gains without some public market gains. Private investors need happy public investors to sell to. It’s far too early to say Uber’s public investors won’t be rewarded, but the stock market has produced another disappointing IPO on a big stage. That’s something the SEC and lawmakers should be concerned about. Taking away some financial flexibility from companies such as Uber and Airbnb may not seem like the best move, but confidence in public markets is more important. If resetting the investor limit would assure that, it would be worth it.  


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