The JOBS Act, the On Ramp Provisions, and the Impact on the Public Offering Process

Congress adopted the JOBS Act ostensibly in an effort to increase jobs by facilitating capital raising.  The Act, however, cobbled together provisions that were introduced separately and were never intended to be part of a comprehensive law.  As a result, some of the provisions work against each other.

One set of provisions, the On Ramp provisions, were designed to make the public offering process easier.  The JOBS Act exempted emerging growth companies from a host of requirements, some reasonable, some less so.  Thus, these companies were required only to produce two rather than three years of financial statements in an IPO.  At the same time, however, the companies were exempted from any PCAOB Rule that required mandatory rotation of independent auditors, despite the fact that no such rule exists.

As a press release concerning a new study put out by BDO:  

less than one-third (29%) of capital markets executives at leading investment banks believe the JOBS Act has been effective in increasing the number of IPOs on U.S. exchanges. This is a considerable drop since last summer when a majority (55%) of I-bankers believed the JOBS Act would be successful in increasing the number of businesses going public. Today, forty-two percent of the bankers see no evidence that the new law is positively impacting IPOs, while more than a quarter (28%) believe that it is too early to evaluate the law's impact.

The study is here.

Nor were some of the other provisions particularly popular.  This was true, according to the study, of the "testing the waters" provision and the ability to file registration statements on a confidential basis.  As the study described:

According to the SEC, in 2012, more than 100 companies utilized the JOBS Act’s confidential filing process to “test the waters” for a possible IPO. More than three-quarters (80%) of I-bankers indicate that this lack of transparency has had a negative impact on their ability to advise clients on their offerings due to a lack of information on potential competitors for investment dollars. Although only 9 percent of the bankers describe this difficulty as “substantial”

Some of the opposition has come from investors.  See id.  ("Almost half (48%) of capital markets
executives report that investor groups are reluctant to meet with emerging businesses that are confidentially testing the waters for an IPO under the JOBS Act, as they prefer to wait until the company has made a public commitment to the offering."). 

Investor resistance can also be seen from the fact that some emerging growth companies have opted out of the provisions while others have opted out of the exemption for new or revised accounting standards.  Moreover, it is common for companies that opt for emerging growth company status to include a risk factor indicating that this may generate investor resitance and impact the liquidity of the trading market. 

But there is another factor that will push down the potential value of the On Ramp provisions.  The JOBS Act also allowed for the use of general solicitations in connection with offerings under Rule 506 (although the SEC is currently in the process of implementing rules in this area).  Amendments to Section 3(b) of the Securities Act altered the small offering exemptions and essentially permitted offerings under Regulation A of up to $50 million. 

Companies that had considered a public offering may instead rely on private placements (marketed through a general solicitation) or a small offering under Regulation A+.  The small offering may require an offering circular (one is currently required for Regulation A).  Unlike a registration statement, however, an offering circular is not subject to Section 11 liability and does not trigger the reporting requirements in Section 15(d) of the Exchange Act.  So even with the reduced requirements contained in the On Ramp provisions, the JOBS Act may negatively impact the number of public offerings by providing a number of alternatives that will be, in some cases, more attractive method of raising capital than an IPO.