President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law on April 5, 2012. We presented an update on the regulatory implementation of the act here and here, as well as a discussion of the Act’s internal contradictions here. While much of the Act left to the SEC the responsibility of designing regulations to implement the Act, it specifically set out provisions designed to ease IPO filing requirements for “emerging growth companies.” This week we have an update on how many companies are utilizing these already implemented provisions.
The JOBS Act defines an “emerging growth company” as a business with less than $1 billion dollars in revenue during the previous fiscal year. The JOBS Act has seven provisions designed to make IPO filing easier for an emerging growth company. These include the requirement to present only two years (rather than five years) of financial statements and an exemption from complying with new or revised accounting standards. The law also allows emerging growth companies to provide reduced disclosure about its executive compensation system, and provides an exemption from certain auditing requirements.
Last month, Morningstar published a study on the effects of this legislation on companies that have filed publicly since the Act’s enactment. According to Morningstar, 56 companies have publicly filed since the President signed the legislation into law. Thirty-Eight of those companies have qualified as “emerging growth companies,” and all but one of those qualifying companies have taken advantage of at least one provision of the Act.
Companies that are filing have adopted most of the provisions, with majority of companies taking advantage of or plan to take advantage of five of the seven provisions. Two of the provisions, however, have not been as widely utilized. Only fifty percent of the qualifying companies provided less than five years of financial data, and only six of the qualifying companies opted out of the new or revised financial accounting standards.
Berkeley Law Adjunct Professor Donna Petkanics, a Partner at Wilson, Sonsini, Goodrich & Rosati in Silicon Valley, believes these results are driven by a combination of factors. She believes that many of the companies were preparing to go public before the Act was signed. Thus, they likely were prepared to provide five years of financial data and comply with previous accounting standard.
Petkanics also thinks use will vary by industry. For instance, in industries where it “is important for the company to show strong growth for investors, they will show the full five years required by the previous regulation,” says Petkanics. “However, if the company is in biotech or cleantech, which are primarily R&D companies, the full five years will be less important to investors.” Thus, in these industries, companies more likely will take advantage of the reduced filing requirements.
Underwriter preference also could be driving these results, says Petkanics. “The company underwriting the IPO may prefer the old standard and may suggest the old standard to their clients,” she says. We will have to wait for a larger sample size, but Professor Petkanics believes that what happens in the next twelve months will be telling.
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