One of the key pieces of the recently passed JOBS Act - the one lobbied for by venture capitalists, and perhaps the only key piece not waiting on SEC rulemaking before taking effect - has to do with lowering the burden of what is required for an emerging company to go public, and then to lowering the burden of compliance requirements, once the company has had its IPO.
The most rabid advocates for the IPO on-ramp herald it as the way to re-awaken IPO activity, as though regulation, not other market forces, pinched the flame. Some IPO on-ramp advocates think a vigorous IPO market is the very key by which to unlock the US economy. See for example this Seattle Times interview of Joe Shocken.
Muckraking journalists, on the other hand, mark the passage of the IPO on-ramp as one more shameful confirmation of Wall Street's unremitting control of national politics. See for example this NY Times piece by Andrew Ross Sorkin, which audaciously suggests that Groupon could have fooled more of the people more of the time, had the IPO on-ramp provisions been in effect a year or two ago.
There's a third hand to consider here, too. In this view, the IPO on-ramp provisions are neither panacea nor the product of plutocratic short-sightedness. In this view, the IPO on-ramp provisions are hardly relevant.
The best expression of this third view, I quoted at length in a prior post. But the remarks (from an experienced securities lawyers who wishes to remain anonymous) bear repitition:
"I personally think that the IPO changes are largely illusory. There has been a lot of noise about simplified regulation. But the SEC has done the equivalent of taking 1,000 pages of regulations and reducing them to 950. Big deal. Plus, the Sarbanes-Oxley stuff has become relatively routine. I also think that the decline in IPOs has little to do with over-regulation, even though it is a factor. It has more to do with what law firms and accounting firms are charging for routine SEC work.
"Tech companies that would have been a plum assignment for Alex. Brown or H&Q in 1999 wouldn’t come close to being eligible today. The boutique investment banks have largely disappeared, and the big ones want big deals. In 1999, $20 million in revenue and a good story was all it took. Plus I’m told the economics are radically different given the huge growth in off-market trading.
"The only way back for the small IPO is a change in the economics at investment banks, and a public resurgence in interest in buying those shares. Some of the changes eliminate much of the periodic SEC reporting regime. Brilliant. Who is going to buy shares in a company and how is it going to trade if there is inadequate public information?"
As if to ring a bell on this anonymous analyst's last point, check out this disclosure in ClearSign's IPO prospectus last week:
'We are an "emerging growth company" under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
'We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
'In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
'We will remain an “emerging growth company” for up to five years, although we will lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30.
'Our status as an “emerging growth company” under the JOBS Act of 2012 may make it more difficult to raise capital as and when we need it.
'Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.'
Photo: "Saviours Comet" by Bridget Christian / Flickr.
