Sarbanes-Oxley Promised To Protect Investors. It Ended Up Freezing Them Out.
Fraud didn’t disappear after 2002. But IPOs did get rarer, private equity got bigger, and ordinary investors got pushed to the sidelines.
In the early 2000s, a series of corporate accounting scandals rocked the financial markets—Enron, WorldCom, Tyco, Adelphia, and others. It was an open secret that some corporations were engaging in deceptive or downright fraudulent accounting practices. In 2002, Congress decided to do something about it and passed what was known as the Sarbanes-Oxley Act (SOX) in July of that year. The law imposed a set of strict internal accounting controls and, most famously, imposed criminal penalties on CEOs who knowingly signed off on quarterly earnings reports that were found to be fraudulent in any way.
Just over 23 years later, the law is considered a success. Since its passage, there have basically been no major corporate accounting scandals (don't confuse accounting scandals with insolvencies). The bill's authors, Sen. Paul Sarbanes (D–Md.) and Rep. Mike Oxley (R–Ohio), have both since passed away—perhaps they would be pleased to see that their legislation has restored Americans' trust in financial markets. What they likely never realized is the massive unintended consequences caused by their law, which we are still living with to this day—consequences more severe than if existing laws and self-correcting market forces were used to deal with the deceptive accounting that was occurring.
For starters, SOX is very expensive to comply with, typically costing companies millions of dollars per year, on an ongoing basis, and thousands of man-hours. The increased administrative cost has affected companies' decisions to go public. Some firms simply do not want the additional regulatory scrutiny that is associated with being public. As a result, fewer companies have gone public over time. In the late 1990s, there were more than 6,500 public companies; today, that number stands at 4,700, depending on the index. There are not even enough public companies to fill the Wilshire 5000 Index, which is a measure of the total market capitalization in the United States. As of 2025, there are now more exchange-traded funds than publicly traded stocks. Having said that, the regulatory burden of SOX is certainly one of many factors that determine whether companies go public. Some don't want the scrutiny from Wall Street analysts. Some don't want to be exposed to shareholder lawsuits. Some don't want to deal with activist investors. But the cost of SOX is the primary factor.
Companies are now going public at a more mature stage of their development than in the past. Amazon went public in 1997 with a market capitalization of $438 million—most companies don't go public today until they are valued in the tens of billions of dollars. For that reason, most of the gains are captured by venture capitalists and private investors rather than by ordinary investors who might once have bought in shortly after an initial public offering (IPO). In this way, SOX—like many regulations—has actually increased inequality, further enriching venture capital firms at the expense of small investors who might have bought the stock directly or indirectly through a mutual fund. By the time a company goes public today, much of the growth is already priced in. A good example is Airbnb, which went public in 2020 with a $47 billion market cap compared with $72 billion today. Uber famously was worth less as a public company than in some of its later private funding rounds.
Apart from the increased cost, some companies have simply concluded that going public isn't worth the hassle. Over the past decade in the U.S., this has coincided with the rise of private equity—funds that buy private companies rather than public ones. Private equity investments now account for roughly $3 trillion in the U.S. and are beginning to compete with the stock market for capital and resources. Many of the larger private equity holdings likely would have gone public were it not for the regulatory requirements imposed by SOX. If they had, retail investors—not just wealthy individuals or institutions—could have shared in those gains. One could make the argument that if Sarbanes-Oxley had never been passed, private equity in its current form might not exist, and that this industry has thrived in a regulatory loophole created by the legislation.
It is important to note that SOX does not prevent bear markets. The financial crisis still happened under SOX, which many people attribute to an obsessive focus on regulatory box-checking rather than prudent risk management. The CEO certification of earnings—with its criminal penalties—is downright draconian. For a large, complex firm, a chief executive cannot certify that earnings are accurate without a high degree of trust that employees are behaving responsibly. One day, there will be a case where a CEO certifies earnings they believe to be accurate, which in fact are not.
Recently, President Donald Trump said he intends to push for semiannual rather than quarterly earnings reporting at public corporations. If SOX were eventually repealed, it would probably not result in a raft of accounting fraud. But even if it did, there are short sellers and internet sleuths ready to expose it. IPOs these days are generally a bad deal because companies are fully valued when they go public. Repealing Sarbanes-Oxley would revive the IPO market, which has been moribund for years.
