It costs approximately $5.7 million in one-time expenses to take a company public in the United States. Add 5-7% of gross proceeds for underwriting, plus $1.5 million annually in ongoing compliance costs (auditing, reporting, Sarbanes-Oxley certifications, Dodd-Frank disclosures). This is the IPO tax.

The tax is profoundly regressive. For a company raising $500 million, $5.7 million is a rounding error. For a company raising $10 million, it is more than half the proceeds. The effect is structural: securities regulations designed to protect investors systematically exclude smaller companies from public capital markets. The companies most in need of public capital are the ones least able to afford the regulatory price of admission.

This explains why the IPO market has been dying. The number of publicly listed companies in the United States has fallen by roughly half since its peak in the late 1990s. Companies stay private longer, grow larger before listing, and increasingly bypass public markets entirely. The regulatory cost of being public is one of the primary reasons.

The JOBS Act of 2012 was explicitly the first securities statute in American history to prioritize capital formation over investor protection. One scholar called it “the biggest deregulatory statute in the history of American securities regulation.” That characterization is accurate — and it underscores how far the pendulum had swung. When the most significant deregulation in securities history still leaves the IPO tax at $5.7 million, the baseline tells you how heavily regulated the system has become.

In Democratizing Startups, I argue that the JOBS Act addressed the wrong end of the problem. It made it easier to issue startup stock through crowdfunding and mini-IPOs. It did not make it easier to resell that stock. The result is a market where entry is cheaper but exit is nearly impossible — and illiquidity, not issuance cost, is the real barrier to democratizing startup capital.

Read the full article: Democratizing Startups, 68 Rutgers University Law Review 101313 (2016).