A number of industry groups, including SIFMA, have joined to put forward recommendations to promote capital formation and assist more companies in going public or remaining public.  Many of the measures suggested in the report have been presented previously, whether in the U.S. Treasury Report on capital markets or in bills introduced in, or passed by, the House Financial Services Committee.  For example, the group suggests:

  • That for issuers that meet the EGC definition, extending the on-ramp provisions of Title I of the JOBS Act from five to ten years;
  • Amending Section 5 of the Securities Act in order to extend the ability to test-the-waters to non-EGC issuers;
  • Extending the Sarbanes-Oxley Section 404(b) exemption from five to ten years for lower revenue EGCs;  and
  • Simplifying or eliminating the “phase out” provisions relating to EGC status.

The report also addresses research related issues and suggests:

  • Amending the Securities Act Rule 139 safe harbor to eliminate the Form S-3 eligibility prong;
  • Allowing research and banking colleagues to attend pitch meetings and reviewing the Global Research Analyst Settlement; and
  • Studying the factors impacting the decision of most firms not to publish pre-IPO research.

Finally, the report addresses other measures, such as regulation of proxy advisory firms, short-selling, the baby shelf restrictions for smaller issuers, and financial reporting and market structure matters, not as closely tied to the IPO market.

Authors Michael Dambra, Laura Casares Field, Matthew T. Gustafson and Kevin Pisciotta recently published a paper, “The Consequences to Analyst Involvement in the IPO Process: Evidence Surrounding the JOBS Act,” which reviews research analyst involvement post-JOBS Act in offerings.  The authors consider whether participation by affiliated analysts in securities offerings affects their research by evaluating analyst activity relating to EGCs.  The control group used are non-EGC issuers.  The authors conclude that pre-IPO participation increases analyst optimism resulting in less accurate reports.  While the paper presents interesting data regarding the value of research, it is difficult to gauge the differences that were observed pre- and post-JOBS Act in research involvement.  Compliance policies for firms, including many not subject to the analyst settlement, prevent analyst participation in the offering process.  There has been little to no practical effect from the JOBS Act relaxation of certain research activities in relation to EGCs.  To the extent that there is greater “optimism” with respect to EGCs, it is difficult to isolate and attribute such sentiment to analyst involvement.

In a recently published paper written by Marshall Lux and Jack Pear titled “Hunting High and Low:  The Decline of the Small IPO and What to Do About It,” the authors observe that initial public offerings undertaken by smaller companies (those below $100 million) have declined disproportionately compared to those of larger companies.  Similarly, while there has been an overall decline in the number of U.S. public companies, the decline of smaller public companies has been more significant.  According to the article, in the 1990s, small IPOs comprised 27% of all capital raised in public markets, while since 2000 they have represented only 7% of all capital raised.  Based on a survey of literature, the authors identify five related principal causes for the decline, including analyst coverage trends, buy-side trends, a shift from active to passive investment strategies, the growth in private capital, and increasingly burdensome regulation.  The authors have a number of recommendations, including the following:  amending the definition of smaller reporting company (SRC), which already was proposed by the Securities and Exchange Commission; extending the emerging growth company on-ramp to ten years from five years; increasing the shareholdings required to bring a shareholder proposal; allowing companies to include mandatory arbitration provisions for shareholder-issuer disputes; and simplifying the disclosure framework.  While it is clear how an extension of the on-ramp provisions and amendments to the SRC definition relate to, or would affect, smaller IPOs, the paper does not explain the rationale for the shareholder proposal or the mandatory arbitration provision changes and the nexus to reinvigorating smaller public offerings.  It would have been interesting to have seen recommendations relating to research coverage, particularly since the authors identify changes in research coverage trends as a root cause of the decline of smaller public offerings.