The public equity markets have long been viewed by companies as the “holy grail” of capital formation. Once a company goes public, it can sell additional shares to the public to raise capital when needed, and can use its shares as currency to make acquisitions. However, since the late 1990s, the public equity markets have been an option for fewer and fewer companies. The number of publicly traded companies listed on exchanges in the United States has fallen from 8,823 in 1997 to under 5,000 at the end of 2011, according to the World Federation of Exchanges. In addition, the number of companies going public through an underwritten initial public offering (an “IPO”) has fallen dramatically, from a high of almost 1,300 during 1996 and 1997 combined to fewer than 200 during 2010 and 2011.
In March of 2011, the Treasury Department formed a group of industry and business leaders focused on emerging growth companies to investigate the drop off in public companies and IPOs, and to explore the link between going public and job creation and retention. Among its findings, the “IPO Task Force” determined that since 2007, the average company going public had been in existence approximately 9.5 years, more than double the historic average of 4.8 years from inception to IPO. The IPO Task Force also determined that among companies that had gone public, 92% of the job growth within those companies had taken place after the IPO, and that since the mid-1990s, emerging companies were far more likely to seek an exit through a merger or acquisition transaction, resulting in a loss of jobs as acquisition targets were consolidated into larger companies making the acquisitions.
The IPO Task Force identified several causes of the slowdown in IPOs. In particular, they focused on the increased regulatory burden (much of which grew out of the requirements imposed by Sarbanes-Oxley) that greatly increased the cost of both going public and staying public, the shift in investment banking business models that favored low-cost, high-volume trading over “buy and hold” investing, and an IPO process that deprived smaller investors of both information and access to an issuer’s securities at an IPO.
The IPO Task Force made several recommendations, many of which were incorporated into the “IPO On-Ramp” provisions of the JOBS Act signed into law earlier this year. These provisions will make it easier for emerging companies to go public, and to stay public once they have completed an IPO, with an eye towards stimulating job creation. These provisions are effective immediately, and are not subject to SEC rulemaking.
The legislation creates a new class of companies referred to as “emerging growth companies.” An emerging growth company is any company that had total annual gross revenue of less than $1 billion in its most recent fiscal year. A company is no longer an emerging growth company on the earlier of: (1) the fifth anniversary of its IPO; (2) its total annual gross revenue reaches $1 billion or more; (3) its public float is $700 million or more; or (4) it issues more than $1 billion in non-convertible debt in the previous three years. Any company that sold securities in a registered public offering prior to December 8, 2011 is excluded from the definition of emerging growth company. Foreign issuers are eligible to be treated as emerging growth companies.
The changes to the current regulatory regime surrounding IPOs should make it easier for emerging growth companies to go (and stay) public, including by:
Many of the new provisions flow directly from the recommendations of the IPO Task Force, and are aimed at providing smaller companies better access to capital in order to spur job creation. There are some commentators and legislators that have been critical of these provisions of the JOBS Act, claiming that loosening of the current regulatory schemes will lessen the protections currently provided to investors. It is likely that as companies start to take advantage of the IPO On-Ramp provisions, some changes will need to be made to tweak the new requirements to fit what is happening in the marketplace. The bottom line, however, is that the new IPO On-Ramp provisions will provide quality companies that want to go public with a real opportunity to do so in an efficient and cost-effective manner, something that hasn’t been available for some time.
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