With the first half of 2016 nearly complete, the annual total of initial public offerings (IPOs) is on target for reaching the lowest level since 2009. It was easy to understand the lack of enthusiasm for IPOs in 2009, because it was the year when the major stock indexes made frightening declines. The S&P 500 reached the Hadean low of 666 on March 6, 2009. However, the major stock indexes are much better in 2016, despite a sluggish start for the year. On June 2, 2016, the S&P 500 closed at 2,105.26, just 1.08% below its July 20, 2015, record-high close of 2,128.28.

Renaissance Capital, creator of the Renaissance U.S. IPO Index, manages the Renaissance U.S. IPO ETF (NYSEARCA: IPO) and provides research on global IPO market trends. Data published by Renaissance Capital indicate that as of June 2, 2016, there were only 34 IPO pricings, compared to the same point in 2015 when there were 70 IPO pricings. These 34 IPOs raised only $5.5 billion as of June 2, 2016. This amount is 55.8% below the $12.5 billion raised by IPOs between Jan. 1, 2015, and June 2, 2015.

In 2016, stock market bearishness does not explain why the number of IPO pricings is so low. Instead, four factors are combining to drag the number of IPOs lower: startups staying private for a longer time, overinvestment in startups, changes in the law allowing more shareholders before a startup must disclose financial statements, and weak performances by 2015 IPOs.

Startups Stay Private for Longer Periods

The venture capital industry is expanding with an increased number of pre-IPO funding rounds. Significant valuation increases often occur between rounds. Startups can continue to raise money during these later stages without significant difficulty. The average age for a company going public in 2014 was 11 years. This compares to the average age of four years for a company going public in 1999. Companies with smaller market capitalization generally experience less success with their IPOs and struggle to remain at their IPO prices after public trading begins. Additional funding rounds can provide the time and capital necessary for the company to experience a successful IPO.

Privately held companies do not need to file quarterly earnings reports with the Securities and Exchange Commission (SEC) like they do after going public. This gives startups the opportunity to develop their extended growth strategies rather than struggling to beat the number every three months. A short-sighted preoccupation with quarterly earnings can become a distraction from the long game.

Overinvestment in Startups

There is a steadily increasing number of so-called unicorn companies. Unicorns are privately held companies with valuations exceeding $1 billion. Companies with pre-IPO valuations exceeding $10 billion are called decacorns. As of June 2, 2016, there were 165 unicorn companies and 14 decacorns.

Because privately held companies do not offer the same price discovery as stocks listed on a major exchange, many investors are relying on the valuations for these shares as reported by mutual fund managers. This situation has motivated some commentators to offer admonitions against this practice because the valuations may be excessive.

Since 2015, the SEC has been scrutinizing the methods used by managers of mutual funds to provide accurate valuations of privately held startups. On July 31, 2015, the SEC updated a page on its website, intended to assist funds and their counsel in understanding and applying the valuation requirements under the Investment Company Act.

Changes in the Law

The Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama on April 5, 2012, increased the maximum number of shareholders a company can have before it must disclose financial statements from 500 to 2,000 when the number of non-accredited investors is less than 500. This expansion allows these companies to raise more capital without incurring expenses to satisfy financial disclosure requirements.

The JOBS Act allows these companies to sell up to $1 million of securities per year to an unlimited number of non-accredited investors. However, these crowdfunding provisions require the companies to provide initial and annual financial disclosures to the SEC. As a result, several crowdfunding platforms are on the internet, allowing people with no investing background to try their luck as venture capitalists.

Weak Performances by 2015 IPOs

Concern about whether public market investors would be enthusiastic about a particular IPO is another factor reducing the number of new offerings. A significant number of IPOs from 2015 are delivering disappointing returns. As of May 18, 2016, the average return for a 2015 IPO stock was negative 19%, and 72% of the 2015 IPOs were trading below issue.