The JOBS Act has made the IPO process for smaller companies in the US quicker, cheaper and easier. That may have boosted listings – and possibly even employment (and not just among bankers). But has it taken away the time investors need to make informed decisions?
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There were few enough moments of bipartisan accord in Barack Obama’s first term as US president. But one was the April 5 2012 signing of the awkwardly-titled Jumpstart Our Business Startups (JOBS) Act.
In theory, the act’s passing, bringing together Democrats and Republicans, was a win-win. Certainly, the legislation’s ambitions were laudable and well-intentioned. It lifted a previous ban against public solicitation by private companies raising funds from a multiplicity of small investors – effectively introducing “crowdfunding”, long established in Britain, to the US. And it cut the cost of going public by allowing smaller firms (so-called emerging growth companies) to circumvent the more onerous provisions of the 2002 Sarbanes-Oxley Act.
Public companies are, after all, particularly good at generating employment. According to data from the past four decades collated by the Washington-based National Venture Capital Association (NVCA), 92% of job creation occurs post-IPO. Light a fire under the US’s primary capital markets, the thinking goes, and jobs will follow.
So has the JOBS Act worked its intended magic? As former Chinese premier Zhou Enlai is meant to have said (when asked about the impact of the French revolution), it’s too early to say.
Unemployment in the US is finally on the wane, dipping below 8% in October for the first time in nearly four years – though most economists ascribe this improvement to a natural (if painfully slow) return to growth in the US economy.
It is also not easy to find tangible evidence linking the new legislation to a direct pick-up in primary capital market activity. True, this has been a solid though not stellar year for US IPOs. Between April 5 and the end of October, 83 companies went public on US bourses, raising US$37.4bn, almost double the US$19bn raised over the same period last year – though still down on 2007 figures.
Nonetheless, some executives point to anecdotal evidence that the number of higher-growth firms exploring the possibility of listing shares in the US is on the rise for the first time in years. Of the 56 companies that completed IPO filings in the five months to September, more than two-thirds qualify as higher-growth corporates, according to research firm Morningstar.
“We have unquestionably seen an uptick in the number of companies interested in going public,” said NVCA president Mark Heesen. “We were at the point before where many entrepreneurs were seeing acquisitions [of their assets] as the only viable exit, and what many are saying now is: ‘Wait, there is a reason to look at the capital markets again’.”
That view is shared by Anna Pinedo, a New York partner at law firm Morrison & Foerster. “There is an incredible number of companies out there doing, or thinking about doing, IPOs,” she said. “Before, they would have seen the process as being too expensive. This suggests the process is working.”
Heesen said there was a “healthy and stable pipeline of companies” seeking to go public, thanks to the act, in the new year.
Another advantage of the new law is that it makes the listing process cheaper. “Sarbox” forced companies, before and after the listing process, to spend money on lawyers and accountants, rather than putting that capital into research and development, new markets and, of course, the creation of new jobs. For smaller firms at least, the new legislation cuts out much of that subcutaneous fat.
“We have unquestionably seen an uptick in the number of companies interested in going public. We were at the point before where many entrepreneurs were seeing acquisitions [of their assets] as the only viable exit, and what many are saying now is: ‘Wait, there is a reason to look at the capital markets again’”
The act has also seriously speeded up the process of getting a company to market. Under Sarbox rules, a “normal” IPO completed on the Nasdaq or the New York Stock Exchange might take anything from three months to a year to complete. A recent Morningstar report found four firms that had gone public within six weeks of their initial public filing. British sporting giant Manchester United, for example, completed its US$233m July NYSE offering just 38 days after filing publicly.
As that deal indicates, the Jobs Act has also proved to be a boon for some non-US companies hoping to tap the US equity markets. China has fallen out of favour with US investors due to accounting scandals around some companies, but it has been a good year for British and Irish companies crossing the Atlantic, led by offerings from industrial vacuum company Edwards and software firm Fleetmatics, in addition to Manchester United.
Yet the drop in Chinese issuance has not been replaced by a JOBS Act-driven surge from others overseas. Just seven overseas-based corporates sold shares in the US in the six months to the end of October, raising US$917m. That compares with 11 completed IPOs (raising US$3.8bn) for the same period last year and 25 IPOs (raising US$3.6bn) in 2010.
Nonetheless, the longer-term hope, retained by US officials and banking industry executives, is that relaxed legislation will lead to a steady increase in the number of foreign companies seeking to list shares in the US, notably from Asia and Latin America. “I don’t think this will herald a new golden era of IPOs,” said a leading executive at a New York-based stock exchange. “But if you want to go public [in the US] it’s certainly more advantageous than it was before.”
Getting it right
And there’s more. Imitation, as well as being the sincerest form of flattery, is usually a sign that you are getting something right – hence the level of satisfaction felt in New York and Washington at signs that European countries are seeking to create their own versions of the JOBS Act.
The UK Venture Capital Association in London is seeking to change legislation to boost IPO activity by smaller-cap firms, while NYSE Euronext is planning a new European bourse with the working title “Entrepreneurs Exchange”, designed in part to prevent Europe’s best young companies seeking listings on the other side of the pond.
Not everyone is happy, though. A few of the JOBS Act’s features have caused significant division, notably the controversial filing provision, which allows companies to test the waters before deciding whether to go public.
“It helps determine if you’re ready for the big leagues,” said Heesen. “If investors look at your company and say – ‘You’re not ready, come back later’ – you know where you stand. Before, if you went before the SEC [Securities and Exchange Commission] and you weren’t ready, you were seen as having failed – you got a black mark against your name.”
But some fret that the new provisions mean investors have too little time – as little as three weeks, in some cases – to analyse a stock before the roadshow begins. The unspoken fear is that laxer regulations will lead to a repeat of the Wild West of the late 1990s before the advent of Sarbox.
“It’s going to encourage people to push the envelope, stretch the rules,” said Bruce Foerster, president of Miami-based South Beach Capital Markets. “As much as I worry that over-regulation has hurt the entire IPO process, the current system relies on transparency and disclosure.” Allowing untested companies to enter the market, he said, is “too risky”.
So the JOBS Act is controversial – as all new legislation tends to be. It remains incomplete – much of the legislation remains a work in progress. But it is a hopeful piece of regulation, in that it is designed to inspire hope in a country built on ambition and opportunity. Will it succeed?
It is, well, too early to say.