Hype or Hush: The Pros and Cons of Going Public Part 2: JOBS Act

Posted On May 27, 2015 | by Kristine Walczak

The IPO market continued its moderate pace in the first quarter of 2015, producing 28 IPOs. Of the 28 IPOs in 2015, return ranges from a loss of 32% of value to a return of almost 230%. All but two of the year’s IPOs have come from emerging growth companies, or ECGs, a phenomenon created by the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April 2012, and is a framework to ease disclosure and other regulatory requirements and lower costs for small companies accessing the public markets. An EGC is a company which reports less than $1 billion in total revenue for its most recent fiscal year.

Due to the cost of regulatory compliance, particularly in the wake of the Sarbanes-Oxley Act of 2002 (covered in our previous pot), smaller companies have been inhibited from entering the public markets for capital. Some believe this decline of the smaller company IPO market over the last decade threatens the long-term prospects of the American economy, as smaller companies that cannot access the IPO market must either rely on private capital to finance their growth or sell themselves to larger companies. Enter the JOBS Act.

A few highlights of the  JOBS Act include:

  • Ability of growth companies to make pre-filing offers to institutional investors
  • Ability to initiate the registration process confidentially with the SEC
  • Requirement for only two, rather than three, years of audited financial statements to go public
  • A “test the waters” provisions to permit smaller companies to approach institutional investors prior to and during the offering period.
  • Allowance for sell-side analysts to publish research reports on EGCs immediately after they become public companies
  • Exemption from SOX Section 404(b), which requires Accelerated Filers to obtain an audit of their Internal Controls over Financial Reporting

The EGC designation has had a tremendous impact on the IPO market. Between January 1, 2012, and May 31, 2014, 548 companies have gone public, with 77 percent of them identified as EGCs at the time of IPO.

Some studies have claimed that quoting and trading in increments of one penny caused brokerage firms to retreat from the small-company market, as the profits that they could make on the spread between bid and asked prices was diminished. In response to this concern, JOBS requires the SEC to conduct a study of the impact of Tick Size on small-cap companies. More on this in our next post.

 

Photo courtesy etftrends.com

Photo courtesy etftrends.com

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