I've heard that this is an unintended side-effect of Sarbanes-Oxley, does anyone have any insight?
It is a downside of Sarbanes-Oxley because the requirements to go public were made (a) much more strenuous and expensive and (b) various senior staff (CEOs etc) were made personally criminally responsible for any accounting errors.
There is always a trade-off with public markets: make them safer but smaller and more expensive or make them bigger and freer and less safer. Where the "right" trade off lies is entirely a matter of opinion.
I wonder if the issue could be lessoned by have step-like requirements: listing a small, medium or large company requires small, medium and large amounts of work instead of one size fits all. Accounting, Audit and other requirements scale with company revenue/capitalisation instead of always being the same?
(a) Because companies were defrauding people in the IPOs. SOX added accounting requirements to make such fraud harder to hide.
(b) Because the senior staff/executive were often complicit in the fraud.
People act like SOX isn't necessary and/or is bad: SOX came about as a result of numerous cases of massive fraud in which the people responsible were not subject to any penalties, and got to keep the bulk of what they "earned" (the legal penalties applied to the companies, and so the investors who got screwed, then they get screwed again due to the companies they're invested in having to pay massive fines).
Anyone arguing that SOX is too strict needs to be able to enumerate the exact things that they would change that would still prevent the fraud that SOX is intended to prevent, and hold responsible those involved when the fraud is missed.
Arguably you could achieve the same results (auditor independence, senior management accountability) without any change to how small public companies behaved. Enron and Worldcom could bend auditors to their will because of their size, <insert tiny company worth under 10mil here> already could not do that. Why not have the requirements scale with size then?
Personally I think Audits will continue to be worthless until Auditors are required to have some "skin in the game": if an auditor signs off a company's accounts and it turns out there was a mass fraud or bankrupt, the auditor is civilly liable for at least some percentage of the loss. That's no different to how rating agencies should also have been reformed. "If you want to know how risky something is, don't ask a 'consultant' paid by the guy selling it, get an insurance quote".
As it is, these things are always trade offs: is it better to lose $1bn in fraud or spend $1.5bn in extra accounting and investigation? If new rules remove 2 frauds but also prevent 200 companies going public is that better or worse? If the US brings in rules and companies just list on other markets and the same investors get defrauded, does any of this matter? And how does anyone even measure the "what if" scenarios with any rigor to inform our decisions? It's not (IMHO) a solveable problem...
I was an early employee of a company that went public in the early 2000s with a market cap of $300M. You just don't see that anymore: companies these days are much larger when they IPO. It seems to me to be unfortunate, and SOX seems like the most likely culprit.
All of the companies in this article could/should have gone public in 2021. They simply missed their window.