The following post comes to us from Carlos Berdejo, Associate Professor at Loyola Law School. It is based on his recent paper entitled “Going Public After the JOBS Act,” which is forthcoming in the Ohio State Law Journal and is available here.
Congressional consideration of further deregulation of the federal securities laws, informally labeled by some as JOBS II, makes an evaluation of the impact of the JOBS Act of 2012 particularly timely. Several of the provisions of the JOBS Act relax the level of mandatory disclosures required of “emerging growth companies” (EGCs) during the IPO process and phase in certain ongoing regulatory requirements following the completion of an IPO. In a recent article, Going Public After the JOBS Act, I gather data on IPOs during the period 2010-2013 and perform an empirical assessment of the impact the JOBS Act has had on EGCs’ access to the public capital markets.
The evidence indicates that EGCs are not only taking advantage of the scaled disclosure requirements made available to them under the JOBS Act, but are also doing so with increasing frequency. For example, during the time period I studied, 87.3% of EGCs elected to file a confidential draft Form S-1 with the SEC. But in the first three quarters following the enactment of the JOBS Act, the percentage of issuers filing a confidential draft was about 72.7%, which is substantially lower than the percentage of issuers who chose to do so during the later quarters in the sample, 90.6%. There was also a considerable increase in the proportion of issuers that elected to include two rather than the standard three years of audited financial statements – from 27.3% in the first three quarters to 44.8% in the last three quarters (the overall sample average is 41.5%). Notably, EGCs that took advantage of the scaled financial disclosure available under the JOBS Act had lower revenues, were younger, and disproportionally belonged to R&D-intensive industries, such as pharmaceuticals. It is worth noting that these figures exclude IPOs in which the initial Form S-1 was publicly filed with the SEC before the JOBS Act became effective, as including these IPOs would merely inflate the reported inter-temporal differences.
Despite the fact that EGCs are embracing the scaled disclosure provisions made available to them by JOBS, there has not been a noticeable increase in the number of IPOs conducted by issuers that qualify as EGCs. Certainly the number of IPOs in the two years following the enactment of the JOBS Act has been greater than the number of IPOs in the two immediately preceding years. However, this increase in activity has characterized not only the IPO market for the smaller issuers that qualify for EGC status, but also the IPO market for their larger counterparts. Comparing the proportion of issuers that are eligible for EGC status among those conducting an IPO in the pre- and post-JOBS periods reveals an interesting pattern: The proportion of IPOs conducted by these EGCs in the pre-JOBS period (87.7%) is actually greater than the proportion of IPOs conducted by EGCs in the post-JOBS period (82.6%). Assuming that the JOBS Act had no effect on the overall number of larger, non-EGC, issuers going public, this suggests that the JOBS Act has not had a substantial effect in increasing the number of smaller issuers accessing the public capital markets via an IPO.
One possible explanation for these seemingly contradicting findings is that while the direct costs of conducting an IPO for EGCs have not decreased following the enactment of the JOBS Act, indirect costs appear to have increased slightly for these issuers. The average total offering costs incurred by EGCs and the gross spread demanded by their underwriters remain unchanged in the pre- and post-JOBS periods of the sample, while larger issuers (who would not meet the EGC requirements) have actually enjoyed slight decreases in these costs. The evidence also suggests, however, that IPO underpricing for these smaller issuers may have increased in the post-JOBS period, even relative to their larger counterparts.
Another possible factor driving the patterns described above is the uncertainty surrounding the duration of the post-IPO benefits provided by the JOBS Act. Take for example the exemption from the requirements of Section 404 of the Sarbanes-Oxley Act. Although SEC rules (predating the JOBS Act) exempt issuers from this requirement for the first annual report (on Form 10-K) following their IPOs, a number of EGCs that went public in 2012 have by now filed their second annual report. Forty-six of the issuers that went public as EGCs in the sample had by May 5, 2014 filed their second annual report. Of these, 26 still qualified as EGCs for purposes of their second annual report and all except one chose not to include an auditor attestation. Remarkably, 28 of these 46 issuers (i.e., 60.9%) that went public as EGCs were no longer eligible for EGC status by the time they prepared their second annual report. These findings will be described in more detail in an upcoming version of the article.
As more data becomes available, it will be possible to conduct more rigorous analyses of the choices made by EGCs not only during the IPO process, but also of their choices as public companies (e.g., decisions relating to disclosure and additional equity issuances) and of the market’s reaction to such choices. Future research could also explore the interaction of the JOBS Act and the growing secondary market for private securities, which has received much attention recently. This interaction is of particular interest as some provisions of the JOBS Act can make private offerings more attractive to some issuers relative to public offerings.