In February of last year, Facebook issued a press release announcing that it had filed the required paperwork for its upcoming initial public offering (IPO) with the Securities and Exchange Commission. ((Jackie Cohen, Facebook Officially Files SEC Documents For $5B Offer, AllFacebook (Feb. 1, 2012, 5:14 PM), http://allfacebook.com/facebook-files-ipo_b76165.)) Shortly thereafter, the SEC published Facebook’s 150-page filing, making it immediately available for public scrutiny. ((Facebook Inc., Form S-1 Registration Statement (2012), available at http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm.)) Just a few weeks ago, Twitter published a similar “press release”. In a single, 140-character tweet, the company announced that it had filed the required paperwork with the SEC for its forthcoming IPO. ((Matt Krantz & Alistair Barr, With a Tweet, Twitter Kicks Off Next Big Tech IPO, USA Today, (Sept. 13, 2013, 7:43 AM), http://www.usatoday.com/story/money/business/2013/09/12/twitter-ipo-filing/2806703/.)) This time, however, the press release was not followed by any SEC publication– 140-characters and no further details left open to scrutiny. This time, the filing was completely confidential. ((Id.)) And yet ironically, the absence of any SEC publication provides perhaps the most notable effect of the recently passed Jumpstart Our Business Startups Act (“JOBS Act”).
Passage of the JOBS Act on April 5, 2012, represented the first significant change in the last 50 years to the Securities Exchange Act of 1934. ((Donald C. Langevoort & Robert B. Thompson, “Publicness” in Contemporary Securities Regulation After The Jobs Act, 101 Geo. L. J. 337, 342 (2013).)) The first of the JOBS Act’s notable provisions reformed existing regulation on crowdfunding. ((James J. Williamson, The Jobs Act and Middle-Income Investors: Why It Doesn’t Go Far Enough, 122 Yale L. J. 2069, 2073 (2013).)) Prior to the JOBS Act, companies seeking to raise capital through public security offerings had to either complete cumbersome SEC registration or look for convenient exemptions to that rule. ((Id.)) One popular exemption was the allowance of “private sales” to “accredited investors.” ((Id. at 2074.)) The majority of these “accredited investors” were privately wealthy individuals and venture capitalists, the angel investors many are familiar with today. ((Id.)) However, as a result of Section 302 of the JOBS Act, “emerging companies” can now raise up to $1 million through crowdfunding sources such as Kickstarter and AngelList, without resorting to more traditional angel investors. ((See id.; See also Om Malik, Day Traders, Angels and Venture Capital: The Internet Changes Everything, Including Money, Gigaom (Sept. 24, 2013, 8:17 PM), http://gigaom.com/2013/09/24/day-traders-angels-and-venture-capital-the-internet-changes-everything-including-money/.))
The second of the JOBS Act’s notable changes dealt with the SEC filing requirements for companies pursuing an IPO. Before April 2012, the SEC, following provisions in the Sarbanes-Oxley Act, required public companies to provide an annual report containing “an assessment . . . of the effectiveness of the internal control structure and procedures of the issuer for financial reporting”. ((See Paul P. Arnold, Give Smaller Companies a Choice: Solving Sarbanes-Oxley Section 404 Inefficiency, 42 U. Mich. J.L. Reform 931, 935 (2009); see also Sarbanes-Oxley Act of 2002 § 404, 116 Stat. 745 (2002).)) But the simplicity of this requirement belied its actual costs. One study reported that compliance with this requirement cost companies anywhere from $1.5 to $7.3 million. ((Joseph A. Grundfest & Steven E. Bochner, Fixing 404, 105 Mich. L. Rev. 1643, 1645 (2007).)) Congress drafted the JOBS Act in part to deal with these costs, which were believed to be the cause of the decreased number of “emerging company” IPOs in the United States over the last decade. ((Uncuffing Capitalism, Economist (Mar. 31, 2012), available at http://www.economist.com/node/21551481.)) Two particular changes within the JOBS Act took aim at lowering the costs for small companies. Under the JOBS Act, emerging growth companies: (1) could release only two years of financial information rather than three, and (2) could avoid registering shares with the SEC until it had 2,000 shareholders, rather than at the typical threshold of 500 shareholders. ((Id.))
Yet a third provision of the JOBS Act– one not obviously related to the costs of going public– is the one that has drawn disproportionate attention lately. ((See Todd Woody, Going Public in Private: The Boom in Secret IPOs, Forbes (May 14, 2012), available at http://www.forbes.com/sites/toddwoody/2012/05/14/going-public-in-private-the-boom-in-secret-ipos/; Chris O’Brien & Walter Hamilton, Twitter’s Stealth IPO Shines Spotlight on JOBS Act’s Effects, L.A. Times (Sept. 30, 2013), available at http://www.latimes.com/news/custom/topofthetimes/business/la-fi-twitter-jobs-act-20131001,0,6948954.story.)) In fact, Twitter’s announcement just a few weeks ago exemplified the effects of this particular provision. The change allows “so-called ‘emerging growth companies,’ those with less than $1 billion in annual revenue . . . to keep their filings confidential until they are ready to market the shares to potential investors.” ((Chris Dieterich, After JOBS Act, Confidential Filers Rise, Wall St. J. (Feb. 18, 2013), available at http://online.wsj.com/article/SB10001424127887324162304578307052032008888.html.)) Companies that qualify for this provision are taking advantage. From the JOBS Act’s passage in April 2012 to the end of that year, nearly three-quarters of the domestic companies that filed their IPO registration qualified as “emerging growth companies”– 59% of those companies chose to file confidentially, ensuring their financial statements would remain unreleased to the public until they began their marketing “road shows”. ((Id.))
With a little over a year’s time to evaluate the effects of the JOBS Act, it is clear early returns have been mixed. On one hand, the number of emerging growth companies choosing confidential submission continues to rise. ((Martin Wellington & Sarah Sollum, On its One-Year Anniversary, Two Cheers for the JOBS Act, Forbes (Mar. 28, 2013), available at http://www.forbes.com/sites/realspin/2013/03/28/on-its-one-year-anniversary-two-cheers-for-the-jobs-act/.)) Some say this provides compelling evidence that the JOB Act’s goal to reduce the risks involved in pursuing an IPO has taken root with emerging companies. ((Id.)) On the other hand, available data indicate that the Act’s effects have been limited. One study found that the number of IPOs per quarter decreased from the year before the JOBS Act’s passage to the year after. ((Steven M. Davidoff, A Year Later, the Missed Opportunity of the JOBS Act, DealBook (Jun. 11, 2013, 5:19 PM), http://dealbook.nytimes.com/2013/06/11/a-year-later-the-missed-opportunity-of-the-jobs-act/.)) What’s more, the same study found that the number of emerging company IPOs per quarter also went down in the years before and after the JOBS Act’s passage. ((Id.))
Anecdotally, examples of the pitfalls that come with confidentiality and limited reporting have already begun to surface in the wake of the JOBS Act. Investors in ChinaCast Education– a Chinese post-secondary education and e-Learning services provider– know these pitfalls well. ChinaCast took advantage of the lax reporting requirements, releasing just two years of statistics, only to collapse shortly after its IPO. ((Steven M. Davidoff, Lax Rules Give U.S. Upper Hand in Tussle Over Alibaba I.P.O., DealBook (Sept. 24, 2013, 6:07 PM), available at http://dealbook.nytimes.com/2013/09/24/lax-rules-give-u-s-upper-hand-in-tussle-over-alibaba-i-p-o/?_r=0.)) In fact, over 100 Chinese companies listed on American exchanges since Congress deregulated the reporting standard have collapsed. ((Id.))
Although the long-term effects of the JOBS Act remain to be seen, interested observers cannot deny that the Act has begun to leave footprints. Whether they point to the increased use of confidential filings or the influx of foreign company listings on domestic exchanges, significant changes in the process of how companies go public are underway. Whether these changes ultimately outweigh the pitfalls mentioned above is an open question. However, following the outcomes of IPOs like Twitter’s may provide a quick glimpse into how that question will eventually be answered.
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