United States: The JOBS Act: An Update

A brief review of the JOBS Act, a look at recent emerging growth company filings with the SEC and an analysis of EGCs and smaller reporting companies

The Jumpstart Our Business Startups (JOBS) Act became law in April 2012. Its major provisions were to:

• Create an IPO "on-ramp" for a new class of registrants called "emerging growth companies" (EGCs)
• Permit general solicitation in offerings under Rule 506 and Rule 144A, provided sales are made only to persons reasonably believed to be qualified
• Create an offering exemption for crowdfunding transactions
• Create an exemption for offerings not exceeding US$50 million within the prior 12-month period
• Raise thresholds triggering registration obligations under the Exchange Act

Some of the initiatives under the JOBS Act have been suggested by market participants for many years in light of the significant changes to the markets and the ways people and companies communicate information. In key ways, Title I of the JOBS Act represents the latest stage in the evolution of the SEC's regulation of issuers according to their "categories"—meaning, generally, regulations scaled to the nature and size of an issuer's business, offerings and the trading markets for its securities.

Whether categorizing issuers or offerings for purposes of Regulation S, eligibility for short-form registration or "ondemand" registration, the challenge for the SEC has always been how to adopt more efficient capital raising techniques in balance with its need to protect investors all within a coherent regulatory framework. This challenge is perhaps one reason why the SEC is taking more time than expected (at least by Congress) to adopt many of the more interesting provisions under the JOBS Act, such as lifting the ban on general solicitation or advertising for offers and sales under Securities Act Rules 506 and 144A and proposing rules to permit crowdfunding. While Title I has already had a measurable impact on the IPO environment, it may be that the elements of the JOBS Act that the SEC has yet to effect will have an even greater impact on the capital markets—both in the US and globally.

EGCs have filed a large majority of the IPOs so far this year and the IPO on-ramp provisions in Title I are being widely used. To provide an update on this use, we completed a random survey of 90 of the approximately 400 IPO filings by EGCs between January 1, 2013, and June 25, 2013, approximately 200 of which were declared effective during that time period. Here is what we learned:

• The IPO on-ramp is increasingly well-trafficked, with a majority of EGCs taking advantage of many of the accommodations provided:
  
  • Although not yet a majority, EGCs that did not describe themselves as either "development stage" (which we define in more detail below) or speculative companies seem to be increasingly relying on the ability to present two, rather than three, years of audited financial statements. EGCs that are also "smaller reporting companies" (SRCs) more frequently present two years of audited financial statements.
  • A significant majority of EGCs disclosed their intention (or ability) to defer having their auditors attest to the effectiveness of their internal control over financial reporting.
  • A large minority of the EGCs we surveyed disclosed their election to comply with new or revised accounting standards applicable to public companies, thus rejecting the relief under the JOBS Act to comply with such standards only when they are applicable to private companies. The EGCs driving this result tended to be larger companies that did not describe their business as being in the "development stage."
  • A large majority of EGCs, both larger companies and smaller reporting companies, did not provide a Compensation Discussion & Analysis (CD&A), or a level of disclosure that would come close to complying with S-K Item 401(b), and relied on scaled compensation disclosure requirements already applicable to smaller reporting companies.
  • Many EGCs submitted draft registration statements on a confidential basis.
• EGCs exist in good numbers across industries including health care and pharmaceuticals (19 percent), services (18 percent), financial and insurance (16 percent), construction and real estate (10 percent), energy and natural resources (10 percent), technology and telecommunications (9 percent) and industrial and manufacturing (7 percent), with the balance relating to wholesale and retail, agriculture and livestock, transportation and other industries.
• There are clear overlaps between EGCs and SRCs and EGC/SRCs and development stage companies (DSCs). We define development stage companies as those that are highly speculative or that have been in existence for less than a year.
  • 41 of the 90 researched identify as both EGC and SRC.
  • 23 of the 41 EGCs/SRCs also described themselves as DSCs:
    • See, e.g., Camp Nine, Inc. and Lion Consulting Group.
    • Several of these self-described EGCs/SRCs/DSCs present less than one year of audited financial statements, have one or two executive officers, have boards comprised of three or fewer members and seek to raise proceeds of US$200,000 or less.
• 
  
• Many EGC IPOs are underwritten by well known investment banks on a firm commitment basis, seek a listing on the NYSE or Nasdaq and are audited by a "big four" accounting firm. Some of these include:
  • Domestic companies: Phillips 66 Partners LP; Bright Horizons Family Solutions, Inc.; RetailMeNot, Inc.; Gogo, Inc.; Evertec, Inc.; LipoScience, Inc.; Portola Pharmaceuticals, Inc.; PTC Therapeutics, Inc.; TriState Capital Holdings, Inc.
  • Foreign private issuers: Knot Offshore Partners LP; QIWI plc; FleetMatics Group PLC (selling shareholder offering); UBIC, Inc.
  • REITs: Rexford Industrial Realty, Inc.; ZAIS Financial Corp.
• More EGC IPOs in our sample are made on a self-underwritten, best efforts/continuing basis, to raise proceeds of less than US$50 million—in many cases far less than that amount.
• Of the 90 EGCs we surveyed, 17 indicated a listing on the NYSE, 25 on Nasdaq (includes all three market tiers), 13 on the OTC markets and pink sheets, five on Canadian exchanges and one on a foreign exchange. The remainder did not indicate any market.
• Foreign private issuers (FPIs) are identifying as EGCs and utilizing the accommodations made available to them as such (and also as FPIs). Six of the 90 researched disclosed they were foreign private issuers.
• Our survey indicated that EGCs generally fall into three groups:
  • The first category comprises EGCs identifying also as SRCs and DSCs. Companies in this group are making highly speculative offerings and providing materially less disclosure than the two other categories of EGCs.
  • The second category is the EGC/SRC group, which is generally utilizing most of the disclosure accommodations for SRCs and EGCs.
  • The third category is the EGC group. These companies tend to be larger with higher revenues and use fewer EGC disclosure accommodations than the other two EGC groups we observed.
  • It will be interesting to see whether these observations hold over time.
• The state or jurisdiction of issuers of all EGC IPOs filed between January 1, 2013, and June 23, 2013 shows some interesting concentration information: Delaware, 39 percent; Nevada, 30 percent; Maryland, 10 percent; other states,17 percent; and foreign countries, 4 percent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.