President Obama signed the JOBS Act into law on April 5, 2012 amid much fanfare and optimism. Small and medium sized fast-growing technology companies and their executives were especially sanguine about this new act as it appeared that it would provide access to much-needed additional expansion capital. These companies were still reeling from the recession and the substantial reduction in available venture capital financing, and they saw the JOBS Act as a potentially positive event. A little more than two years later, has this initial optimism proved to be warranted? Let’s take a look at some of the provisions of the Act.
A new regulatory structure for crowdfunding was initially the most anticipated provision of the JOBS Act. I never believed that crowdfunding would be as beneficial as some people did, but I hoped that it could provide some additional access to capital for smaller companies which were starved for funds. Unfortunately we are still waiting for the SEC’s final crowdfunding regulations. The SEC appears to be caught between two complaining factions here – one which thinks the proposed rules are too restrictive and won’t work, and one which thinks the proposed rules are too permissive and do not provide sufficient investor protection. Even when these new regulations arrive, it’s clear to me from the proposed regulations that crowdfunding is not going to become a huge source of additional financing for most companies. Some innovators have found ways to productively use crowdfunding (see my blog post: “States take the lead on crowdfunding”), but I don’t anticipate that crowdfunding will have a significant positive effect for any issuers except perhaps small companies which don’t have access to other capital.
One of the most promising provisions of the JOBS Act is the proposed substantial update to Regulation A (termed Regulation A+). See my blog post: “Regulation A+ – Last gasp of the JOBS Act”. Regulation A has largely been ignored by issuers over the years, but these proposed changes should make it a viable financing method for many companies. I believe that this part of the JOBS Act could have a substantial positive effect on the ability of certain companies to raise additional capital. Unfortunately we are still awaiting the final Regulation A+ regulations from the SEC, although these regulations are on the SEC’s agenda and some commentators think that we will see them this year. One of the last big issues here appears to be preemption of state law by Regulation A+ which has generated resistance from state securities regulators.
One area that has seen a substantial increase in activity is the emerging growth company (“EGC”) IPO space. The JOBS Act defines EGCs as companies with annual revenues of less than $1 billion. IPO activity in this space had lagged substantially in recent years. This IPO activity has substantially increased over the last two years. So far this year EGC IPOs have comprised approximately 87% of all IPOs. For comparison, EGC IPOs were about 80% of the total IPO volume in 2013, and only about 50% of the total IPO volume in 2012. There have been 176 EGC IPOs so far this year, with proceeds of about $28 billion. Contrast that to 2013, when there were 107 EGC IPOs with proceeds of $16 billion. The pending EGC IPO pipeline appears to be fairly full, with approximately 50 transactions currently lined up. Obviously something great is happening here, but can the JOBS Act take all the credit?
While it is difficult to confirm the exact role of the JOBS Act in this IPO boom, I believe that the Act has played a significant role in this IPO boom. Many commentators believe (and I agree) that the JOBS Act’s confidential registration statement filing procedures have been a key element of the JOBS Act’s success in this arena. Under this provision, issuers can elect to file their registration statements with the SEC on a totally confidential basis. They can then deal with the SEC, fine tune or totally change the registration statement, and generally get the offering into good shape to proceed, all confidentially. Issuers may also be able to “test the waters” to gauge investors’ possible interest in an offering. When the issuer is ready, it can proceed with the offering (after a minimum 21 day waiting period) but on a much more efficient and targeted basis. The issuer can also elect to postpone or terminate the offering without potential investors seeing any of the disclosure materials. This appears to me to be an extremely efficient and cost effective way to do an offering. Issuer reception to this confidential filing treatment has been very enthusiastic. Approximately 90% of eligible EGC issuers have elected to use this process since it became available. Many of these issuers were high profile technology companies such as Twitter, Box, and Go Pro.
Many commentators give high praise to this confidential filing aspect of the JOBS Act. Doni Bloomfield’s blog on Bloomberg.com provides a good summary of the benefits that many experts attribute to the JOBS Act and this confidential filing process. If you want a deeper analysis, commentators from Penn State and SUNY Buffalo collaborated on a research paper entitled “The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision”. These authors are convinced that the JOBS Act has been a major factor in this IPO boom They concluded that, even accounting for favorable market conditions, the JOBS Act has led to 21 additional EGC IPOs on an annual basis. This is a 25% increase over EGC IPO levels prior to the JOBS Act. Other experts, such as Professor Jay Ritter at the University of Florida, caution that it is difficult to separate unrelated market conditions that are also aiding this EGC IPO boom. Professor Ritter specifically mentions increased IPO activity in the biotech sector, some of which he believes is independent of the JOBS Act’s effects. He does, however, acknowledge that the JOBS Act has provided at least some support for this IPO boom.
The confidential filing aspects of the JOBS Act have also generated fairly substantial criticism from some observers. The main thrust of this criticism is that an issuer’s ability to move relatively quickly to selling its securities after a confidential filing leads to a lack of transparency. Additionally, critics feel that this relatively short time period between the end of the confidential period and the sale of securities by the issuer is too short for investors to absorb the information and make a fully informed investment decision. I don’t agree with this criticism. It’s not like issuers are hiding behind these confidential filing procedures – they are dealing closely with the SEC and identifying and correcting problem and issues. If anything I believe that this confidential process probably leads to cleaner and more correct disclosure materials and that it accomplishes this in a more efficient manner. Emily Chasan at The Wall Street Journal posted a good discussion of these concerns here. Accounting professors from Stanford, University of North Carolina, and University of Pennsylvania also published a detailed analysis of some of these concerns called “The JOBS Act and Information Uncertainty in IPO Firms”, which is available here. This analysis is summarized in The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Overall I give the JOBS Act a C+ to date. Some of this is due to the SEC’s delay in finalizing certain components of the Act. This grade will increase substantially if the Regulation A+ rules turn out to be as beneficial as I anticipate and if the IPO boom continues. If you want to dig deeper, Ernst and Young provides a very helpful detailed look at the metrics of the JOBS Act’s performance to date in a paper available here