JOBS Act Isn’t Effective According to Academic Study Findings
Jumpstart Our Business Startups Act (“JOBS Act”) was signed into law in April 2012 with the intent of reducing the cost and regulatory burden for small firms seeking to raise capital in both private and public markets. The JOBS Act provides for a stream-lined initial public offering (“IPO”) process for a new type of company called “emerging growth company” (“EGC”).
An EGC generally includes companies with less than $1 billion in revenues in the most recently completed fiscal year. Title I of the JOBS Act creates a so-called IPO “on-ramp” designed to lower the cost of raising capital. The “on-ramp” reduces the mandated disclosure and compliance obligations for EGCs during the IPO process and the first few years as a public company. A recent academic study indicates, however, that these goals are not being achieved.
A study examined 213 EGC IPOs that occurred between April 2012 and April 2014. See “The JOBS Act and the Costs of Going Public.” According to the study’s findings, there is little evidence that the JOBS Act effectively lowered the cost or increased the volume of IPOs.
The study found “no evidence” that EGC status resulted in a reduction of “direct costs of issue, such as accounting, legal, or underwriting fees.” In addition, the “lower mandated disclosure” resulted in less transparency and greater underpricing (an offering price significantly lower than the price of the first trade).
The study indicated, however, that greater underpricing was present only for larger firms that were “newly eligible for reduced disclosure and delayed compliance.” As for smaller companies, the study found “no evidence” that they experienced “any change in their cost of capital.” Overall, the study concluded that the JOBS Act did little, if anything, to increase the number of IPOs. The lack of increase in overall IPO volume is consistent with the findings that the benefits of the JOBS Act are outweighed by higher costs of capital.