Will the New JOBS Act Change the IPO Landscape?
The pendulum is swinging back from very expensive, tight controls on smaller companies to more relaxed, less costly methods. The new JOBS Act will have a big impact on IPOs and access to private capital.
When the dot bomb era exploded, the public clamored for sweeping legislations to put more oversight into public companies. The Sarbanes Oxley Act was the result of the government’s reaction to the public’s demands, and it implemented very strict oversight and constraint on public companies as the answer to fix the public’s lack of confidence.
As a result, the cost to become a public company rose by a large multiple of what it had been before Sarbanes Oxley, as did the cost of being public and filing necessary reports with the SEC each quarter and year. Additionally, executives of public companies faced potentially punitive and criminal charges if they made a mistake. So, many businesses felt that the benefits of gaining liquidity by being public were overshadowed by the high costs associated with going, and being public, and the risks and penalties potentially imposed on management by being a public company.
The Facebook Exception
For those of you who haven’t kept up, the result for us in Silicon Valley was a further obstacle for young companies to become publicly traded firms. The IPO window has effectively been shut since about 2001. Granted, some companies have been able to find a public market for their securities, while others, like Facebook, have found ways around the requirements of public companies by using the Second Market to trade their shares. Shareholders in companies like Facebook have been able to buy and sell their shares in this manner, and the price per share has continued to climb. Earlier this year, Facebook filed their S-1 indicating their intent to become a listed company, and register their shares with the SEC
Easing Sarbanes Oxley IPO Restrictions
With the JOBS Act, the landscape is changing again. Many of the restrictions imposed by Sarbanes Oxley have been eased or removed for companies with a market cap of less than $1 billion, which will include almost all new IPO’s from Silicon Valley, other than Facebook
Following is a brief overview of the IPO On-Ramp portions of the JOBS Act affecting smaller companies finding liquidity in the public markets as presented by Wilson Sonsini Goodrich & Rosati:
Facilitating IPOs For Emerging Growth Companies
- Reduced financial information required
- Confidential review by the SEC of draft registration statements
- Pre- and post-filing communications are allowed with Qualified Institutional Buyers (QIBs) and institutions that are accredited investors
- Analyst research reports are permitted before potential or actual IPOs
- Relaxed restrictions on securities analyst communications
Relaxing Public Reporting Requirements For Emerging Growth Companies
- Auditor attestation on internal controls not required on 10-K
- PCAOB audit rules on auditor rotation/reports generally will not apply
- Compliance relaxed on public company accounting pronouncements
- Advisory votes on executive compensation not required
- Reduced disclosure relating to executive compensation
So, what this is showing me is that our government is now trying to encourage small companies to be able to seek liquidity and funds from the public, and not be overly burdened with the costs of being a public entity.
Further, the JOBS Act will make it easier for private companies to raise capital by amending the SEC rules as described by Wilson Sonsini Goodrich and Rosati:
Easier Access to Private Capital
- General solicitations to accredited investors and Qualified Institutional Buyers
- No broker-dealer registration under certain conditions
- Increased offering size under Regulation A to $50 million
- Higher shareholder threshold for registration and public company reporting
Wilson Sonsini goes on to note:
Unlike the IPO on-ramp provisions of the JOBS Act, the access-to-private-capital provisions of the act clearly require the SEC to engage in rulemaking. While the amendments to Rule 506 are specified to occur within 90 days, the other provisions do not require the SEC to adopt the implementing rules within any specified time period. Accordingly, it is unclear how soon companies will be able to take advantage of the changes to private capital-raising that are made in the JOBS Act….
A Proper Correction or an Overcorrection?
Again, common sense has begun to prevail, as the restrictions are being loosened. The real question that will be discussed in many circles is whether the pendulum is swinging too far back in the other direction. We have shown a history of continually overcorrecting a problem, only to create a new one. Only time will tell if this is the case once again.
Rich Brenner is Founder and CEO of The Brenner Group, one of Silicon Valley’s premier professional services firms. Rich is a veteran executive, entrepreneur, investor, board member, and philanthropist.
Read more about Silicon Valley news, trends, and commentary in The Brenner Banner
Original post permalink: