The JOBS Act IPO On-Ramp
I’ve written extensively on the Crowdfunding Act, or Title III of the Jobs Act, and much less extensively on the other five titles of the Act. Today’s blog will focus on Title I of the Jobs Act – Reopening American Capital Markets to Emerging Growth Companies. Several industry types have been referring to Title I as the IPO On Ramp and so will I.
The Jobs Act
The JOBS Act created a new category of companies defined as “Emerging Growth Companies” (EGC). An EGC is defined as a company with annual gross revenues of less than $1 billion that first sells equity in a registered offering after December 8, 2011. In addition, an EGC loses its EGC status on the earlier of (i) the last day of the fiscal year in which it exceeds $1 billion in revenues; (ii) the last day of the fiscal year following the fifth year after its IPO; (iii) the date on which it has issued more than $1 billion in non-convertible debt during the prior three year period; or (iv) the date it becomes a large accelerated filer (i.e. its non-affiliated public float is valued at $700 million or more).
The $1 billion figure seems crazy high to me. A report issued by Jay R. Ritter, Cordell Professor of Finance, University of Florida entitled Initial Public Offerings Sales Statistics through 2011, showed that in 2011; only approximately 13% of IPO companies had sales in excess of $1 billion. I was surprised the figure was that high. However, upon thinking about the fact that Title I of the JOBS Act in essence waters down and eliminates many of the Sarbanes Oxley Act of 2002 (SOX) and other strict regulatory requirements for companies engaging in a new IPO, I realized the number isn’t high at all. Title I of the JOBS Act eliminates many SOX and other regulatory requirements for newly public companies – that is its goal and point, so its broad application makes sense from that perspective.
Emerging Growth Companies
The particular relief that an EGC will have is: (i) EGC’s will only need to provide two years of audited financial statements instead of the now required three years; (ii) EGC’s can report executive compensation as a small business and will not be required to obtain shareholder approval for executive officer compensation; (iii) no SOX Section 404 internal control over financial reporting audit requirements; (iv) relief from compliance with new US GAAP accounting requirements; (v) confidential submittal, review and treatment of IPO registration statements with the SEC until just 21 days prior to commencing a road show; (vi) elimination of restrictions on publishing analyst research and communications while IPO’s are underway; (vii) permitting EGC’s to test the waters by communicating with qualified investors regarding interest in the offering; and (viii) waiving conflict of interest restrictions on three way communications between research analysts, investment bankers and company management.
Having been practicing securities law for 19 I witnessed firsthand the devastating financial impact that SOX had on smaller public companies, and what a great deterrent it was to those considering going public. I always ask a new client that is looking at a going public transaction, “why they want to be public”. The usual answer, and appropriate answer, is to access capital markets and to obtain financing for growth and acquisitions and hopefully make money for their shareholders and investors.
On the downside are the tremendous costs of maintaining compliance with the Securities Exchange Act of 1934 reporting requirements. Those costs are not just financial; the time costs on management are also tremendous. In fact, once public, the bulk of time spent by senior management is dealing with being public, whether it is making sure internal controls are effective, reviewing transactions for disclosure requirements, reviewing draft 10-Q, 10-K’s and 8-K’s or dealing with investment bankers and shareholder relation issues.
Even prior to making the decision to go public, the perceived costs are a deterrent. I believe that the JOBS Act, and in particular Title I granting an IPO on ramp and reporting relief to EGC’s will alter that perception enough to cause an influx of IPO’s. In fact, the first quarter of 2012 has seen the biggest jump in new IPO filings since 2007. That is what we know about. Since EGC’s can now submit registration statements confidentially, we do not know how many have done so and are on the IPO on ramp right now.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.
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© Legal & Compliance, LLC 2012