New IPOs Cannot Be Processed During Potential Shutdown, SEC Chairman Says

Companies cannot go public if the SEC lacks the staff to process the paperwork, and public companies may be unable to make new offerings.

The Securities and Exchange Commission will be left with “a skeletal staff” in the event of a government shutdown, unable to process new IPOs or take new enforcement actions, SEC Chairman Gary Gensler explained Wednesday. His remarks were given in response to questions at a hearing of the House Financial Services Committee.

Gensler estimated that between 90% and 93% of the SEC’s staff would be furloughed during a shutdown. This would result in the SEC operating with a staff of approximately 400 of its total 4,600 employees.

Many SEC functions would have to halt in that scenario, including reviewing and approving documents related to IPOs. In response to a question from Representative Maxine Waters, D-California, Gensler said, “The initial public offering market would be shut down with the government,” and firms already in the process of going public would be in a “subliminal state where they cannot access the markets.”

He added that, in some cases, public companies will not be able to make new offerings because the SEC will lack the staff necessary to process the paperwork.

The possible shutdown of the government and the IPO market comes as initial offerings have begun to pick up this year, with a total of 79 sold so far in 2023, up from 71 for all of 2022, according to data from Renaissance Capital. This year’s activity remains significantly lower than the 397 that priced in 2021. Renaissance also reported 130 IPOs filed with the SEC so far this year, an 18.2% change from the same date last year.

The SEC would also be unable to take on new enforcement actions. Gensler explained that the public can still give tips to the SEC Division of Enforcement, but “there won’t be the people on the other side to investigate it.”

As for rulemaking, Gensler said the SEC “cannot finalize rules,” but comment files will stay open. He added that, in the event of a shutdown, there would not be staff to read those comments as they come in. The SEC has at least two comment periods that close in October, including a proposal on the conflicts of interest associated with the use of artificial intelligence due October 10 and a proposal on how advisers safeguard client assets due October 30.

Gensler noted that government shutdowns also damage employee morale and retention at the SEC. Most employees will be furloughed or expected to work without pay, and “it’s hard on people. They can get jobs at law firms and elsewhere.”

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