Since the start of the COVID-19 pandemic, everyone from politicians to reporters to ordinary Americans have been talking about drug treatments, vaccines, and the Federal Drug Administration (FDA) approval process. These discussions have centered on vaccine developments by well-known pharmaceutical giants such as Pfizer and AstraZeneca as well as emerging startups like Moderna Therapeutics and BioNTech.
Almost a decade ago, lawmakers and regulators took steps to improve capital access for startups by easing the regulatory requirements for publicly selling stock. Under the Jumpstart Our Business Startups (JOBS) Act of 2012, Congress and the Securities and Exchange Commission (SEC) significantly reduced disclosure requirements and compliance costs for newly public companies. The JOBS Act aims to foster innovation and create jobs by lowering the cost of innovation capital for smaller companies.
We analyze the effects of these efforts on innovative firms in our paper, “Deregulating Innovation Capital: The Effects of the JOBS Act on Biotech Startups.” We focus our analysis on biotech startups because they are among the companies that the JOBS Act is most likely to affect: firms that have a strong need for investment capital but lack adequate funding. Biotech startups typically generate zero product revenue for several years and are therefore unable to internally fund new product development. Moreover, access to capital is crucial for biotech startups as the process of new drug discovery, clinical trials, and FDA review takes 10 years or more on average.
Understanding the impact of the JOBS Act on biotech startups also has important societal implications. Biotech companies develop therapeutic products targeting a variety of health conditions, such as neurological, cardiovascular, and infectious diseases. We find that the leading drug candidate at more than a quarter of the biotech companies that launch post-JOBS Act initial public offerings (IPOs) are cancer-based therapeutics. Just under 20 percent of biotech companies that conduct an IPO after the JOBS Act are developing drugs that target a rare disease. Thus, the capital access provisions of the JOBS Act have the potential to yield important societal benefits.
We find that the JOBS Act had a profound effect on biotech startups. Hundreds of them, including Moderna and BioNTech, went public by using the act’s exemptions. Our analyses show that annual biotech IPO volume from 2012 to 2018 increased by 219 percent over a similar period before the JOBS Act. Moreover, biotech companies account for just under 40 percent of all IPOs in the U.S. after the JOBS Act.
In addition to changes in biotech IPO volume, we measure three key developments that our analyses attribute to the JOBS Act: an increase in product development, greater capital formation, and more job growth. We find that post-JOBS Act biotech startups go public 1.34 years earlier while in the FDA approval process, which is almost 20 percent earlier in their product lifecycles. These companies raise an average of 29 percent more money in their IPOs than do companies that went public before the JOBS Act. Thus, lower compliance burdens seem to encourage companies with early-stage product candidates to access public markets and raise more capital despite greater uncertainty about product development success.
The JOBS Act also lives up to its namesake. Employment at biotech companies grows an average of 150 percent in the first three years after the companies go public under the JOBS Act. This rate is significantly greater that the rate of job growth at non-biotech companies that launch post-JOBS Act IPOs and biotech companies that went public before the JOBS Act. These findings suggest that biotech startups translate research and development investments into jobs at a greater rate when regulatory burdens are tailored to the companies needing access to capital.
We next assess whether the JOBS Act had unintended costs. We find no evidence that biotech companies that launch IPOs after the act fail at a greater rate than such companies that went public before the JOBS Act period, even though they went public earlier in their lifecycles. The percentage of financial restatements and disclosures of internal control weakness also decline for newly public biotech companies after the JOBS Act. Thus, the benefits of the JOBS Act do not appear to come at the expense of diminished startup quality.
Our paper also presents survey evidence of biotech executives that quantifies the cost of eventual compliance with SEC rules on internal control audits. Understanding these costs is important because biotech startups tend not to generate revenue for extended periods of time. Thus, compliance costs introduce potential tradeoffs with investment in product development and safety.
Overall, our study demonstrates that regulatory exemptions under the JOBS Act encourage capital formation, employment growth, and product development at innovative biotech startups, thus providing important economic and societal benefits. These findings should have continued importance to regulators and lawmakers as we demonstrate the benefits of adapting securities regulation to the unique aspects of evolving industries, which can encourage innovation capital formation.
 Title I of the JOBS Act creates a class of issuers known as Emerging Growth Companies (EGCs), based on financial properties such as annual gross revenues under $1 billion, which was raised to $1.07 billion in 2017. Under the “IPO On-Ramp” provisions of the JOBS Act, EGCs are permitted to confidentially submit their IPO registration statement, use test-the-waters communications with certain investors, and provide audited financials for two rather than three fiscal years. EGCs also enjoy up to five years of scaled disclosure requirements; exemptions from auditor attestation of internal controls over financial reporting mandated by Section 404(b) of the Sarbanes-Oxley Act; and deferral of compliance with changes in accounting standards. See SEC, “Spotlight on Jumpstart Our Business Startups Act, available at https://www.sec.gov/spotlight/jobs-act.shtml; and SEC, “Emerging Growth Companies,” available at https://www.sec.gov/smallbusiness/goingpublic/EGC.
 See Lipsky, M., Sharp, L. (2001). From idea to market: the drug approval process. The Journal of the American Board of Family Practice 14(5), 362-367; and Pharmaceutical Research and Manufacturers of America (2015), “Biopharmaceutical Research & Development: The Process Behind New Medicines,” available at http://phrma-docs.phrma.org/sites/default/files/pdf/rd_brochure_022307.pdf
This post comes to us from Craig M. Lewis, the Madison S. Wigginton Professor of Finance, at Vanderbilt University’s Owen Graduate School of Management, and Joshua T. White, assistant professor of finance, at the Owen Graduate School of Management. It is based on their paper, “Deregulating Innovation Capital: The Effects of the JOBS Act on Biotech Startups,” available here.
Are there controls for secular trends that might be affecting the level of capital investment in biotech?