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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.

Recently, SIFMA held its Equity Market Structure conference, which addressed a broad range of issues.  Of course, conference participants addressed market structure concerns that may affect a company’s decision to undertake an IPO or to remain public and pointed to recent statistics, reprinted below.  The Securities and Exchange Commission has also undertaken discussions regarding equity market structure issues.  Representatives from the Commission recently spoke at a University of Chicago-sponsored symposium commenting on the Treasury Department report recommendations to review market structure issues.  The Commission has had the tick pilot in operation for some time providing for wider tick increments for smaller companies as a means of improving liquidity.  While the pilot is set to expire early in the fall, it is clear that tick size increments alone are not a solution to achieve greater liquidity in the trading of stocks of smaller companies.  For many companies considering an initial public offering, while listing rules, tick sizes and liquidity may factor into their considerations, these usually do not figure prominently in their decision making.  It is interesting that the Treasury Department report recommendations regarding equity research rules have not received more attention by the Commission or by other market participants given that research coverage (and not market structure) concerns are top of mind for management of emerging growth companies.

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.