The U.S. Government, in a major effort to crack down on corporate abuse, passed the Sarbanes-Oxley Act in 2002. Critics have said from the outset that the legislation is too harsh and that a lighter regulatory touch is necessary. Yet it’s not clear that business is actually being harmed.

The latest, and oft-cited, ammunition by those who say SOX has gone too far can be found within the shifting sands of the global market for initial public offerings.

During 2005, the London Stock Exchange hosted 354 IPOs, while just 193 deals were completed by the New York Stock Exchange and the Nasdaq combined, Ontario Securities Commission chairman David Wilson noted in a November speech at the OSC’s annual conference. Wilson made the point while arguing in favour of Britain’s more principles-based approach to regulation.

The numbers are even more dramatic when you consider IPO value. Data from Thomson Financial show that in 2005, the value of IPOs listed in the U.S. dropped about 20%. In contrast, IPOs in Europe, the Middle East and Africa rose 71% — to almost double the U.S. value. So far this year, the IPO market in the EMEA region is even stronger. IPO issuance in the first nine months of 2006 almost matched last year’s total and is up 65% compared with the same period a year ago. The nine-month figure is more than double the U.S. total.

SOX critics conclude that companies simply are choosing to list elsewhere, specifically in London, to avoid complying with the act and to take advantage of what is perceived to be a more forgiving regulatory regime in Britain.

“It would be a little too soon to give all the credit for these good numbers to Britain’s principles-based regulation,” Wilson said. “But it has definitely got to be one of the contributing factors.”

A similar view apparently has been adopted by Gerry Phillips, Ontario Minister of Government Services, the department responsible for securities regulation. Speaking at the same conference, Phillips said that in light of the fact that Britain apparently has stolen a march on the U.S. in the IPO business, and that it has a more principles-based system, he believes Canada should be moving toward a more principles-based system.

“At the very least, as we are looking at the common regulator, can we also take advantage of this to move to a securities act that would give us a competitive edge?” Phillips asked. “Perhaps a more principles-based approach,” he added.

Canadian authorities are hardly alone in such thinking. Indeed, the notion that recent IPO trends should drive regulatory policy has become popular south of the border. In a recent speech to the Economic Club of New York, U.S. Treasury Secretary Henry Paulson said the dominance of the U.S. capital markets is eroding. To combat this, he called for more principles-based regulation, a more principles-based accounting regime, less punitive enforcement, tort reform, streamlining of the regulatory system, and implementation of SOX that does a better job of balancing its costs and benefits.

In response to criticism about compliance costs, U.S. Securities and Exchange Commission chairman Christopher Cox is promising changes in how the SEC implements SOX. He drew attention to section 404, which deals with internal controls, a major part of SOX that Canadian regulators chose not to mimic in their own rules.

“In the weeks ahead, the U.S. will unveil significant changes to the implementation of section 404 of Sarbanes-Oxley that are designed to make it more useful for investors,” Cox said in a speech to the International Organization of Securities Com-missioners technical committee conference in London.

“Those changes will be aimed at ensuring that the internal control audit is top-down, risk-based, and focused on what truly matters to the integrity of a company’s financial statements. They will provide guidance for both companies and their auditors to permit common sense reliance on past work, and on the work of others,” he said. “The overarching objective of these significant changes will be to reduce the cost to investors while increasing the benefits in terms of investor protection.”

Although many firms will welcome changes to SOX, it still remains highly speculative as to whether the tougher regulations are hurting the capital markets.

For one, the IPO picture isn’t as neat as it first appears. According to data from the World Federation of Exchanges, although the NYSE saw its new listings slide in 2005, new listings were up by about 35% from their 2003 total. As well, the number of domestic new listings in 2005 were more than double the number recorded in 2000, before SOX was enacted.

@page_break@Similarly, although the LSE saw a significant increase in new listings in 2005, the action was almost all from domestic firms. It hosted 21 new listings of foreign companies in 2005. While more than double the listings in 2004, it is well down from the number the LSE attracted before SOX was introduced, and before Britain’s Financial Services Authority made a concerted effort to adopt principles-based regulation. In 2000, the LSE had 33 foreign new listings, and in 1996 it was host to 50 new listings from foreign companies.

There are numerous other reasons why the IPO market may have tilted recently against the U.S. and in favour of foreign markets.

For one, some of the action on foreign markets is coming from large privatizations of government assets. Thomson Financial data show the largest deal of 2005, hosted in Hong Kong, was the US$9.2-billion IPO of China Construction Bank. In Europe, French IPO activity jumped from US$2.1 billion in 2004 to US$9.2 billion, largely due to the 6-billion euro offering by Électricité de France.

This year, the numbers will be skewed again, by the biggest IPO ever: the US$19-billion flotation of the Industrial & Commercial Bank of China, which was debuted in both Hong Kong and Shanghai in October. There was also the US$10.6-billion IPO for the Russian state oil company, Rosneft, which took place in London earlier this year.

That such large deals are taking place in other parts of the world reflects the fact that there are many more of them to do. There are more assets available to privatize, and the equity culture that dominates the U.S. economy is only just developing in other parts of the world, allowing more of the deals to take place.

Moreover, global markets are more developed and, therefore, better able to handle such deals than in the past.

A study published earlier this year by the LSE and the City of London found, for example, that underwriting costs are lower in London than New York. It found that underwriting fees are typically 3%-4% in London, vs 6.5%-7% in New York. Companies may be fleeing Wall Street’s greedy investment bankers as much as they are avoiding its micro-managing regulators.

Also, companies in the U.S. are issuing more debt to meet their funding needs. Thomson data shows issuance of U.S. investment-grade corporate debt is up 31% in the first nine months of the year from the same period a year ago, and issuance of high-yield debt is up 24%.

Another factor in the falloff in public equity in the U.S. is all of the money sloshing around the private equity business. Data from Thomson and the National Venture Capital Association show that in the third quarter, buyout funds raised US$22.9 billion, taking the year-to-date total to about US$84 billion. The figure has the buyout fund business on track to surpass 2005’s fundraising total, and the private equity business is poised to raise more money in 2006 than it did in 2002, 2003 and 2004 combined.

Private equity has become increasingly popular as investors, particularly sophisticated investors, look for alternative assets. Returns for private equity typically are higher than for other asset classes, both traditional and alternatives. All the money going into the funds is also affecting the supply of public equity. The funds are taking out already-public companies, and venture investors may see private equity buyers as more attractive exits than an IPO. Although companies might be happy to be taken private to evade SOX, that’s far from being the driving force behind the private equity boom.

If there’s one area in which the impact of SOX on companies’ willingness to remain public in the U.S. is measurable, it’s in the number that choose to “go dark” — deregister their securities, often by reducing the number of public shareholders below the threshold that requires the company to be registered.

A recent study by Australia’s Centre for Corporate Law and Securities Regulation at the University of Melbourne found SOX has affected the motivations of public companies to go private. It found that 44 of 114 companies that decided to “go dark” in 2004 (39%) cited SOX compliance costs as the reason.

It also points to another study that found the frequency of firms going private increased modestly after the passage of SOX, a decision it found to be logical for small companies for which the benefits of being public are relatively small and, therefore, more easily outweighed by the added costs of being public. So, among smaller companies, the regulatory environment may be having an effect on the margin.

One example is Toronto-based FNX Mining Co., which announced its intention to delist from the American Stock Exchange in the spring.

It cited SOX as one reason for its decision, noting, “Overall, these complexities and administrative burdens and their associated costs far outweigh any benefits derived from our Amex listing.”

In a statement, the company also indicated that it decided to list on the Amex in 2003, after SOX was adopted, to increase its U.S. retail trading volume and attract coverage from U.S. analysts. Neither goal was achieved, it found.

Even for the companies that appear to be most meaningfully affected by SOX, the act itself isn’t enough to push them out of the market. The tides of the global IPO market aren’t driven by just one factor, either. IE