The JOBS Act and the IPO Off Ramp: Discouraging IPOs

One of the big developments of late has been the rush to pass legislation designed to reform the capital raising process.  The House adopted H.R. 3606, THE REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES ACT OF 2011.  Despite the emphasis on raising capital, the short title for the legislation is the JOBS Act (‘‘Jumpstart Our Business Startups Act’’), suggesting that the purpose of the legislation is to spur jobs.

There is much to be said about this legislation and much to be criticized (certainly of the version that made it through the House).  But we want to point out one thing right off the bat. 

Section 1 creates a class of companies (called emerging growth companies) then promptly exempts them from a grab bag of requirements that include the need for the advisory vote on compensation (say on pay) and certain financial disclosures.  This is the so called "IPO On-Ramp" legislation.  By imposing weaker standards on these companies, it is theoretically designed to encourage IPOs.  In fact, it is likely to have exactly the opposite effect.  

The statute defines emerging growth company as any company with less than $1 billion in gross revenues and allows companies to retain that status until the earliest of:  gross revenues exceeding $1 billion; qualification as a large accelerated filer (issuers with an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more), or the fifth anniversary of the "first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933." 

For companies that remain below the $1 billion mark, they can effectively retain their "emerging growth company" status simply by refusing to do an IPO.  Given the many exemptions from registration (some provided in the JOBS Act), they can continue to raise capital selling shares but not need to engage in a registered offering.  As long as they do not trigger the size/float requirements, they will remain an emerging growth company indefinitely. 

The legislation, therefore, creates a strong incentive for public companies under $1 billion not to engage in a public offering, exactly the opposite of what the legislation is trying to accomplish. 

J. Robert Brown