The IPO “On-Ramp”

Posted by on January 7th, 2013

Happy New Year, Folks.

Over the holidays, an old friend of mine asked me what I thought about 2012 and the upcoming year. After a few minutes of back and forth about the way things have changed so much since we were kids and a few wise cracks about the fiscal cliff, we started talking about the things that we believe will have the most impact on our businesses in 2013. For him, it’s Obamacare. For me, it’s the “JOBS Act” or the Jumpstart Our Business Startups Act.

The JOBS Act was a landmark U.S. Securities Law Legislation that President Obama signed into law on April 5, 2012. The legislation is aimed directly at returning access to the vast pool of U.S. public capital, specifically for small- to mid-sized innovative and high growth companies in order to spur job creation and boost economic growth. The JOBS Act does so by facilitating a number of capital raising avenues and alternatives, and reducing the regulatory burdens and other barriers to entry into the public capital markets for smaller companies under U.S. federal securities laws.

Among other changes, the JOBS Act establishes a new category of issuer, the Emerging Growth Company or EGC. Any company that is deemed EGC eligible will benefit from significant exemptions from some of the reporting and other obligations under U.S. securities law, including the right to file confidential registration statements with the SEC. In short, issuers that fall into the category of an EGC will have what is effectively an “IPO On-Ramp.”

Before I get into why I am excited about the JOBS Act and what I think it means for the marketplace that I play in, I thought I would share some details about the EGC status and some of the relaxed IPO requirements and restrictions that help to create the “IPO On-Ramp.”

To be eligible for EGC status, your company must have less than $1 billion in annual revenues and must not have issued shares under a registration statement on or before December 8, 2011. A company can retain the EGC status until:

• The first fiscal year after its annual revenues exceed $1 billion;
• The date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt;
• The first fiscal year in which it achieves “large accelerated filer” status (at least 12 months of reporting history and at least $700 million in public float); or
• The first fiscal year following the fifth anniversary of its IPO

If your company meets these requirements, the benefits can be far and wide. Here is a quick summary of how the relaxed IPO requirements and restrictions under the JOBS Act help to create the “IPO On-Ramp”:

• Reduced restrictions under Sarbanes-Oxley (“SOX”)
o The JOBS Act amends Section 404 of SOX to exempt EGCs for up to five years from the requirement of providing auditor’s attestation reports on its internal controls. This significantly reduces recurring compliance costs (not to mention time and effort).

• Exemption from new accounting pronouncements
o An EGC is also exempted from complying with any new or revised U.S. GAAP accounting changes applicable to public companies until the same changes are made applicable to private companies

• Reduced disclosure in registration statements to the SEC
o Under the JOBS Act reforms, an EGC need not provide more than two years of audited financial statements in an IPO registration statement on Form S-1 or Form F-1. Also, an EGC need not provide selected financial data or MDA in subsequent SEC filings for any period prior to the earliest audited period presented in connection with its IPO.

• Reduced executive compensation disclosure
o The JOBS Act exempts an EGC from recently enacted executive compensation disclosure requirements. EGCs are exempt from providing shareholders with an advisory vote on executive compensation and the Dodd Frank Act disclosure requirements for the ratio of CEO-to-worker pay compensation.

• Exemption from PCAOB rule
o An EGC is exempted from future Public Company Accounting Oversight Board (“PCAOB”) rules, including newly proposed rules relating to auditor rotation requirements.

Now, that’s a lot of big breaks for little companies. It also bodes really well for me, my firm, and anyone else that earns their living counseling small- and mid-sized companies.

So, what do I expect to see in 2013? A lot more small IPO’s!

If I’m right, I think we are looking at a major league shift in the small- and mid-sized investment banking scene including a flood of new, smaller investment banks competing for all the new business that doesn’t whet the appetite of the mid-tier and top-tier firms. I also expect to see a lot fewer reverse mergers into OTC Bulletin Board shells (thanks in part to FINRA’s ongoing war on RTOs).