A Boost to the IPO Market
Lawmakers have a plan to jumpstart the IPO market by lowering the bar for investors and reducing filing and compliance costs with the JOBS ACT 3.0. The House passed the Act (the “Act 3.0”) by a vote of 406-4 in July 2018 and it is on the Senate’s docket for early 2019. The legislation is comprised of over 30 bills, including several measures designed to make it easier for emerging growth companies to raise money.
The original Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted in 2012 to help small businesses secure funding by easing certain existing securities laws and creating a new retail crowdfunding exemption, Regulation Crowdfunding. Some of these changes included Title II’s call for lifting the ban on general solicitation, Title III’s creation of the ‘Funding Portal’ Finra member, and Title IV’s mandate to amend Regulation A.
How Will Jobs Act 3.0 Affect Existing Legislation?
1. Expands ‘Testing the Waters’
If passed, the Act will further loosen the rules surrounding general solicitation, allowing all issuers to gauge investor interest in advance of an IPO filing by “testing the waters” with the qualified institutional buyers and other institutional accredited investors in connection with securities offering. This is an expansion of the concession first afforded to “emerging growth companies” under the original JOBS Act, and piggy backs on the SEC’s allowance (2 years ago) of all companies, regardless of size, to file confidentially when going public. The new proposal “would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering,” says SEC Chairman Jay Clayton.
2. Broadens the Definition of an Accredited Investor
Currently, to qualify as an accredited investor, an individual must have either an annual income of more than $200,000 ($300,000 for couples filing jointly) for the past two years, or a net worth exceeding $1 million. The Act 3.0 would expand the criteria to allow people to invest in startups based on their “experience and expertise.” Expanding the definition of an “accredited investor” would therefore permit a larger segment of the public to invest in private placement offerings because of the amended definitions more inclusive nature.
3. Relaxes the Rules for Confidential IPOs
The third proposed update is to amend (and thereby relax) the rules for filing confidential IPOs. The current rules permit “an emerging growth company” or any person authorized to act on its behalf file confidentially. The Act 3.0 proposes to change the wording to “an issuer” or any person authorized to act on its behalf. This would widen the pool of companies able to explore confidential filings.
4. Eases Regulatory Burdens
The fourth objective of JOBS Act 3.0 is to reduce the economic costs of going public by relaxing the requirements for companies to produce quarterly financial reports. On average, initial regulatory compliance costs more than $1 million in one-time costs associated with an IPO. The Act 3.0 directs the SEC to analyze the costs and benefits of quarterly reports and provide recommendations to Congress for decreasing costs, increasing transparency, and increasing efficiency of quarterly financial reporting. The aim is to allow smaller companies to delay various financial reporting requirements. These tactics would enable more companies to secure an IPO by allowing them to spread the cost over a longer period of time, thus reducing the financial burden of going public.
5. Creates Venture Exchanges
The last key adjustment is the creation of venture exchanges. Venture exchanges are securities markets specifically tailored for trading smaller and startup company securities to increase liquidity for early stage investors in private startups. It has been argued, and stands to reason, that companies with 10,000 shares should not be regulated equally to those with 10 million shares. The Act 3.0 would allow for the registration of “venture exchanges” with the SEC to provide a venue for small and emerging companies and offer a platform to trade their securities. It would also permit the trading of venture securities, which would apply to early stage companies whose shares are Regulation A+ securities, as well as listed companies whose shares are below the average daily trade volume. The creation of venture exchanges would help even the playing field such that small and startup companies could attract investors.
Taken together, these changes would encourage and enable new, smaller companies to go public, thus invigorating the venture capital industry and the economy.
Where Are We Now?
On March 4th the proposal completed a sixty-day public comment period.