Washington policymakers are pushing for an expansion of JOBS Act provisions designed to entice companies to pursue IPOs.
The House Financial Services Committee on Oct. 11 approved two bills that would expand IPO provisions from the Jumpstart Our Business Startups Act of 2012. One bill would loosen IPO restrictions, such as pre-deal communications with investors, for all issuers rather than just those that meet the JOBS Act-defined emerging growth company qualifications, which include having gross revenue of less than $1 billion in the most recently completed fiscal year. Another bill would extend the period during which emerging growth companies are exempted from some Sarbanes-Oxley Act reporting requirements to up to 10 years from five years.
In an October report, the Treasury Department called for similar changes among its recommendations for promoting companies' access to capital. Treasury suggested extending the Sarbanes-Oxley reporting exemption to 10 years and allowing all companies to take part in pre-deal communications with investors, a provision known as testing the waters.
Policymakers are pursuing the changes in part because the number of U.S. publicly traded companies has been trending down. The Treasury report noted that the number of domestic public companies listed in the U.S. has declined by nearly 50% over the last two decades.
The Securities and Exchange Commission has already expanded one aspect of the JOBS Act's IPO provisions. In June the SEC announced that it would allow all companies, not just those that qualified as emerging growth companies, to file IPO registration statements confidentially.
Most companies that have gone public in recent years have already been allowed to take advantage of the JOBS Act IPO provision because they qualify as emerging growth companies. The Treasury report noted that nearly 87% of the firms filing for an IPO after April 2012 have identified themselves as emerging growth companies.
Snell & Wilmer LLP Partner John Della Grotta said he believes more companies would consider an IPO if the testing-the-waters provision were expanded or if the Sarbanes-Oxley reporting exemption period were extended. Della Grotta said some companies do not see the current Sarbanes-Oxley reporting exemption period as a big cost-saving incentive.
"Five years — that goes by pretty fast," he said in an interview.
He said many companies are taking advantage of pre-deal communications with investors, which allows them to gauge investor interest in an IPO. Della Grotta said the meetings with investors help make the IPO process more efficient and reduce some of the cost for issuers.
"Testing the waters has been a very helpful tool of the JOBS Act," he said. "That provision has helped facilitate IPOs."
The pre-deal communications are helpful because the compressed IPO road show schedule does not always allow companies to build significant relationships with investors, said Morrison & Foerster LLP Partner Anna Pinedo.
"It's often beneficial for institutional investors to have more time with the companies that have more complex stories," Pinedo said in an interview.
While Pinedo noted that the issuers have benefited from JOBS Act IPO provisions, she doubted that an expansion of the testing-the-waters provision or the Sarbanes-Oxley reporting exemption would substantially increase the number of IPOs. "I don't think the reasons that companies decide to go public or stay private is affected by these regulations," she said. "I think there are other dynamics going on."
Finding more ways to support trading liquidity after companies go public is a better way to entice companies to pursue IPOs, said Weild Capital LLC Chairman and CEO David Weild IV. He noted that liquidity in some stocks has improved thanks to the JOBS Act's tick pilot program, which has the stock prices of some 1,200 smaller-cap companies moving in five-cent increments rather than one-cent increments.
Weild believes more companies could benefit if the program were designed differently. He said he supported a recommendation in the Treasury report that would allow issuers to determine the tick size for their stock.
Wider tick sizes would increase trading margins for broker/dealers, giving them more of an incentive to make markets and provide research on companies that have less-liquid stocks, Weild said. "What's most important?" he asked. "They have to fix the after-market support model once companies are public."