JOBS Act

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In November 2018, SIFMA published another primer in its recently introduced series on capital formation–this one titled “An exploration of the IPO process and listings exchanges”. The primer provides interesting statistics on IPO trends.

The primer notes the decline in the number of US listed companies.  The number of listed companies peaked in 1996 at 8,090, but is down to 4,336 at the end of 2017, or a 46 percent decline during this period.  The number of IPOs in 1996 was 860 and that was down to 173 in 2017. Deal value is also down from 1996 to 2017.  US IPOs represented only 10 percent of total global IPOs in 2017 but averaged 51 percent in the 1990s.  The decline in small cap IPOs (deal value less than $2 billion) also is well documented.  Small cap IPOs peaked in 2000 at 382, and reached a trough in 2008 with 37.  The average was 153 from 2000 to 2017, with a three-year average of 124.

The primer explores a number of theories underlying the decline in IPOs.  Among these, the primer cites the decline in equity research coverage.  Interestingly the number of research analysts has declined 10 percent from 2012 to 2016.  Budgets have declined 51 percent from 2008 to 2016 at the largest investment banks.  Whereas the average company with a market cap of $500 million or less used to have three to four analysts, now the number of analysts is down to one or two. While the last version of JOBS Act 3.0 would have required a study on research for EGCs, little attention has otherwise been directed to address the role of research coverage in the decline of smaller IPOs

On October 23, 2018, the Heritage Foundation hosted a discussion entitled, “Problems with the JOBS Act and How They Can Be Fixed” that featured University of Kentucky College of Law Professor Rutherford B. Campbell. The discussion centered on the impact of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”), its benefits, its shortcomings, and recommendations on how to address those shortcomings related to Titles II, III and IV.

The JOBS Act was enacted to reduce the regulatory burden on small businesses seeking to raise capital to launch or grow their business. Campbell praised Title II’s elimination of the prohibition against general solicitation and general advertising under Rule 506(c). However, he lamented that Rule 506(c) was still limited to sales to accredited investors. Campbell discussed Title III and argued that small businesses are simply not utilizing Regulation Crowdfunding. Campbell noted the mere $49 million in funds that was raised through Regulation Crowdfunding in 2017. He asserted that the limitations and concerns regarding integration “make no sense at all.” As an alternative, Campbell recommends a two-way regulatory integration safe harbor that allows for crowdfunding and permits traditional advertising while conducting a campaign. Additionally, Campbell recommends rethinking the periodic reporting requirement under Regulation Crowdfunding. By doing so, Campbell believes more small businesses will utilize Regulation Crowdfunding. Campbell then examined Regulation A+ under Title IV, noting there are still compliance, accounting and legal hindrances. As a solution, Campbell proposes federal preemption for Tier 1 offerings. Overall, Campbell advocates for the implementation of these recommendations to enhance the current regulatory framework for small business capital formation.

Partner Anna Pinedo joined IFR’s US ECM Roundtable for a panel discussion that assessed the current state of the market, discussed the latest trends and developments, and gave an outlook for the remainder of the year and beyond.  Topics included the state of the IPO market; private capital to public markets; JOBS Act 3.0; SPACs as an alternative to IPO; areas of success; and the convertible bond market renaissance.

Read IFR’s special report on the Roundtable here: https://goo.gl/qJWaqR.

Since the financial crisis, the IPO market has been somewhat volatile, but in the last few quarters, the market has shown growth. A recent Audit Analytics report notes a number of factors that may contribute to the relatively slow rate of growth of the IPO market, including the abundant availability of private capital (both equity and, increasingly, debt), the overcorrection of the market for historically high IPO valuations, and M&A exits.

Based on data provided in the report, there have been 1,758 IPOs since 2008. 66% of these IPOs were completed after the enactment of the Jumpstart Our Business Start Ups (JOBS) Act.  At the time of this post, there have been 27 IPOs withdrawn in 2018, according to Nasdaq.  The report also notes that there has been a 46% decline in the number of SEC registrants.

Both regulators and Congress have taken steps to ease the burden of accessing the public capital markets.  For example, the report highlights the expanded ability to submit draft registration statements confidentially to all companies, which took effect in July 2017.  Based on Audit Analytics data, the report noted that EGCs made up 70% of all IPOs in the first quarter of 2017, and now EGCs make up almost 90% in 2018.  IPO costs are one of the main reasons for companies deferring their IPOs.

Shifting focus to unicorns, Audit Analytics reported that these companies, which are valued at over $1 billion, made up only 7% of all IPOs in the first quarter of 2018.  In 2017, 10 unicorns went public, which represented 2% of all IPOs completed and in 2016, 11 unicorns went public, representing 5% of all IPOs.

Audit Analytics also looked at total IPO proceeds raised by year, as shown above.  Post JOBS Act, IPO proceeds seemed to steadily increase and then dropped again significantly in 2015 and 2016.  Based on their data, the report notes that the second and third quarters are the strongest for IPO activity, which leads us to believe that 2018 will finish on a positive trajectory.

Read Audit Analytics’ full report for more.

Late on Tuesday night, the House passed the recently unveiled JOBS & Investor Confidence Act on a vote of 406-4. The almost unanimous decision advances the bill, commonly referred to as JOBS Act 3.0, which is comprised of 32 individual capital formation-related pieces of legislation.

Among other reforms, the bill proposes changes to existing rules that would affect regulations on angel investors; the definition of an “accredited investor”; the expansion of IPO on-ramp expeditions for EGCs; and the easing certain securities regulations for IPOs.

House Majority Leader Kevin McCarthy, co-author of the original JOBS Act, noted that the Act is “…evidence of this House’s commitment to expanding opportunity for American workers and investors.”

We will be following this post with a more comprehensive legal update discussing the bill.