The Jobs Act and the Interference with Capital Raising
The JOBS Act ostensibly had as a central purpose the elimination of restrictions on capital raising in order to facilitate job creation. The Act raised a number of concerns about investor protection. These concerns, in turn, threatened to generate less, not more, capital raising.
An example may be the so called "On Ramp" provisions. These were provisions designed to reduce the regulatory requirements for "emerging growth" companies. For the most part, these are companies worth less than $1 billion that have been public for no more than five years. They avoid certain disclosure obligations (fewer years of audited financial statements and a dispensation from new or revised accounting standards) and a pack of other requirements such as the need to submit executive compensation to shareholders ("say on pay").
Shareholders have fewer rights. They will receive less disclosure. In a rational environment, this could result in investors shunning the companies. In fact, that is exactly the concern confronting companies eligible to be treated as an "emerging growth company." According to CFO.com:
- During one week last month, at least 13 companies, including HomeTrust Bancshares, Plesk, and LegalZoom.com, warned investors in their Securities and Exchange Commission prospectuses that the regulatory relief provided by the JOBS Act could actually be a turnoff.
What is an example of this disclosure? As one company decribed in its risk factors:
- We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if potential investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile or decrease.
Emerging growth companies may suffer harm through investor resistance. Moreover, the harm may not be limited to them. Section 107 of the JOBS Act allows companies to opt out of the On Ramp exemptions. Yet investors without the time or inclination to figure out which is which may well have an incentive to simply avoid investing in any company that has recently gone public.