Will increasing access to the public capital markets really increase American job creation and lead to greater economic growth?
In multiple hearings on the House and Senate bills that eventually became the JOBS Act, only a few presenters addressed questions, and the evidence seemed mixed. Teasing out the importance of just this one factor (i.e. access to the public capital markets) as an explanation for the lackluster growth in jobs and anemic economic growth during the past couple of years is a difficult exercise.
What does the JOBS Act do to improve a company’s access to the capital markets?
Let’s separate out the public market from the private one. The Act creates what is being called a simpler “on-ramp” to the public market for a firm that meets the new statutory definition of an emerging growth company (EGC) — simply stated, a company with less than $1.0 billion in annual revenue. I suggest you read the complete text of the Act to learn all its details. But here are a few highlights. The Act:
- Requires only two years of audited financial statements in an initial registration statement rather than three,
- Requires only two years of “selected financial data” in an initial registration statement rather than five,
- Allows for a confidential review of an initial registration statement by the SEC, rather than the complete public disclosure of the initial statement and subsequent amendments,
- Permits research analysts to publish research reports on an EGC before the commencement of its IPO, rather than waiting 40 days after that date, and
- Frees EGCs from complying with provisions of the Sarbanes-Oxley Act, including those dealing with auditor attestation of internal controls, auditor rotation, shareholder votes on executive compensation, and disclosures of executive compensation.
How does the JOBS Act affect companies seeking private placements?
It amends current SEC rules in several ways. Here are a few highlights. The Act:
- Increases the amount of securities that can be issued in a 12-month period under Regulation A from $5 million to $50 million,
- Raises the shareholder threshold at which a private company becomes a “reporting company”
- for SEC purposes from 500 to 2,000, subject to other conditions detailing the mix of accredited, non-accredited, and employee owners,
- Permits an EGC to raise as much as $1 million during a 12-month period using “crowdfunding,” i.e., selling securities through a broker or funding portal registered with
- the SEC,
- Allows issuers using the crowdfunding route to make only certain financial information available to investors, depending on the size of the offering, and
- Limits the amount of securities an issuer can sell to an individual, depending on the investor’s net worth and annual income.
What will be the impact of these changes?
Realistically, no one knows. But it’s possible to suggest a few outcomes:
- Raising money from the public will be easier, both for legitimate companies following the letter and the spirit of the rules, and for those attempting to prey on the gullible public investor.
- Certain shareholders in certain companies will receive less information about their investments than they do today.
- The SEC will be challenged like never before to maintain a complete awareness of the actions of dozens of new issuers and their agents.
There is one thing I’m sure of: there will be some unintended consequences that may or may not result in the JOBS Act achieving its objectives.
Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column contact him at Michael.email@example.com or at Tel: (610) 260-6232; Fax (610) 260-6285.