Efficacy of the 1992 Small Business Incentive Act

Purpose - The purpose of this paper is to test the fundamental purpose of the 1992 Small Business Incentive Act (SBIA) to reduce the regulatory burden for small firms to raise public equity capital. Design/methodology/approach - Our research compares initial public offerings (IPOs) that filed with the newer SB‐2 program to benchmark firms that filed using the traditional S‐1 filing. The authors use three proxies to measure success, hypothesizing that, if the regulatory burden has indeed been reduced for small firms, all three variables should be smaller for SB‐2 IPOs. Univariate and multivariate analyses were conducted. Findings - With regards to easing regulatory costs, it is found that the program has not been effective. On average, SB‐2 IPOs experience larger‐scaled offering expenses, and pay higher underwriter gross spreads compared to S‐1 IPOs of similar size. SB‐2 IPOs, however, take fewer days to complete the registration process, when controlling for other relevant factors. In the burden of time, the SBIA has been effective. Practical implications - The paper is of value to managers of firms desiring to conduct an IPO. These managers, if they meet the size requirements dictated by the SEC, can elect to use an SB‐2 or an S‐1 document. The paper shows that if cost is the primary concern, the S‐1 program should be preferred. If time is the primary consideration, then the SB‐2 program is preferred. Originality/value - To the authors' knowledge, they are the first to test the efficacy of the SBIA program.