The JOBS Act: Growth Company Bonanza or Regulatory Morass?
Assessing a law that's only four years old is difficult: by legislative life spans, four years is a blip. But the Jumpstart Our Business Startups Act of 2012 was designed to be a fast-acting measure — an economic defibrillator that would revive access to capital for small to midsize businesses. So it's not too early to ask if the JOBS Act, a major achievement of the Obama administration, is a success so far. In addition, with some congressman introducing legislation that would alter the law s ..
David P. Hooper
Wayne R. Pinnell
While the JOBS Act helped spur larger, venture capital- and private equity-backed companies to consider IPOs, it has not served to revive the smaller IPO market. Perhaps the IPO market downturn will cause market participants to consider the merits of a Regulation A+ offering with an exchange listing.
Long before the JOBS Act was contemplated, proposed legislation was being considered that would have raised the dollar threshold for Regulation A offerings. Supporters argued that Regulation A, which at the time allowed smaller public offerings of up to $5 million, could be amended and become a means of reviving the smaller IPO market.
While smaller IPOs raising $75 million and under in proceeds had flourished in the 1990s, the IPO market had undergone substantial changes beginning in 2001. The number of IPOs declined compared with prior periods, companies generally waited longer before undertaking IPOs, and the IPOs that were completed were larger. In effect, the amendments to Regulation A were conceived of as the original “IPO on-ramp.”
Title IV of the JOBS Act, which made more significant changes to the framework for smaller public offerings, provides an exemption for U.S. and Canadian companies that are not required to file reports under the Securities Exchange Act to raise up to $50 million in a twelve-month period.
The final rules also make the exemption available, subject to limitations on the amount, for the sale of securities by existing stockholders. The rules modernize the existing framework under Regulation A by, among other things, requiring that disclosure documents be filed on EDGAR, allowing an issuer to make a confidential submission with the SEC, permitting certain test-the-waters communications, and disqualifying bad actors.
The final rules impose different disclosure requirements for Tier 1 (offering cap of $20 million) and Tier 2 (offering of $50 million) offerings, with more disclosure required for Tier 2 offerings, including audited financial statements.
To date, experience with Regulation A+ offerings has been limited and mixed. Internet-based platforms view the ability to test the waters in connection with a possible Regulation A+ offering as a means of engaging in “crowdfunding.” This has brought the Boston Beer consumer offering approach into the internet age, with Regulation A+ offerings being marketed to customers of the issuers.
While the affinity offering has its advantages, it does not serve the objectives usually associated with an IPO — that is, resulting in a liquid market for the IPO issuer’s securities, attracting equity research coverage, and creating a market following for the issuer. Of course, when the final Regulation A+ rules were adopted in early 2015, the IPO market was active. An issuer willing to commit resources to preparing an SEC disclosure document and that sought a liquidity opportunity was strongly encouraged by bankers to pursue a traditional IPO rather than experiment with a new offering format.
A lot has changed since. The number of IPOs and the proceeds raised declined in 2015 and the first quarter of 2016 has been the slowest quarter for IPOs in the United States since 2009.
In a challenging IPO market, perhaps issuers that would like to raise capital may be more likely to consider a Tier 2 Regulation A+ offering with a contemporaneous Nasdaq listing and a more traditional marketing and book-building approach. In the past, we have observed that during periods when the traditional IPO “window” has been closed, hybrid offering formats have become attractive alternatives. Perhaps the IPO downturn will prove to be the catalyst for Tier 2 Regulation A+ offerings with exchange listings and these offerings will fulfill the role initially conceived of by advocates of the amendments.
At this stage, the operative word is still “perhaps.” However, one need only look to the history of private investments in public equity transactions and registered direct offerings to appreciate that when the IPO window is closed, or open just a crack, alternative financing methodologies become much more interesting to market participants.
Anna T. Pinedo is a partner at Morrison Foerster. She has concentrated her practice on securities and derivatives, representing issuers, investment banks/financial intermediaries, and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes.