By David Cole, Partner, Holland & Knight
In a recent post, we discussed the new JOBS Act, the spectrum of opportunities it creates for emerging growth companies to raise capital, and that its IPO on-ramp may spur middle-market companies to consider going public.
EGC IPOs should proceed differently from how IPOs have worked in the past. Below we’ll take a brief look at some of the factors which may tend to make it easier to go public, may reduce the transaction costs involved in going public and that may make it easier to satisfy on-going compliance requirements for public companies.
The result of changes made by the JOBS Act should make it easier for EGCs to go public and for their underwriters to market their securities. Prior to completing an EGC’s IPO, the JOBS Act permits:
- underwriters and issuers to test the waters without running afoul of well-established gun-jumping rules
- issuers to file a registration statement with the SEC for confidential review
- issuers to include two rather than three years of audited financial statements in its IPO registration statement and prospectus
- issuers to provide summary financial disclosure for two rather than five years
- issuers to include reduced MD&A and executive compensation disclosure in an IPO registration statement and prospectus
- research analysts working at the same financial institution as lead and managing underwriters to communicate directly with potential investors
By decreasing the number of years required for audited financial statements to two years rather than three years, the JOBS Act should reduce IPO transaction costs to an extent. For example, auditors need only provide comfort on two rather than three years of financials in the registration statement and prospectus. Second, post-closing EGCs will not need to obtain from their auditors a § 404(b) attestation of the adequacy of the company’s internal controls over financial accounting. This auditor attestation has contributed significantly to the on-going compliance costs public companies incur since Sarbanes-Oxley.
Strategically, the JOBS Act allows EGCs to explore a capital markets transaction without concern about competitors learning too much about the company should the IPO not materialize. Gun-jumping rules previously prohibited underwriters from disclosing publicly much about a potential issuer’s IPO before filing a registration statement with the SEC. Now issuers and underwriters can test the waters through oral and written communications with qualified institutional buyers and institutional accredited investors to determine whether they might have an interest in the IPO. When combined with the ability to file an IPO registration statement confidentially, EGCs may have less concern about beginning an IPO process and may even engage a dual-track strategy by filing an IPO registration statement confidentially when also pursuing a sale of the company.
The JOBS Act also reduces executive compensation disclosure for EGCs. EGCs need only present the type of executive compensation information that a smaller reporting company must disclose ─ even if the value of the EGCs voting and non-voting common equity held by non-affiliates exceeds $75 million. Also, by suspending the say-on-pay, say-on-frequency and golden parachute disclosure requirements for EGCs, management may be more inclined to pursue an IPO.
As a result of these and other changes, IPOs should become a more attractive option for EGCs. Issuers may also find it attractive to raise capital in tranches on an as-needed basis, rather than in larger transactions, without the need or potential liability associated with a shelf registration statement. As an EGC’s valuation rises, each subsequent secondary offering would dilute founders and other early stage investors less, making the multiple tranche secondary offerings attractive to them. This could lead to increased deal volume generally in the U.S. capital markets.
In our next posts, we will look at the ongoing reporting requirements for emerging growth companies along with new opportunities to raise capital through private placements, Rule 144A and Regulation A+ offerings.
For more detailed information on changes affecting issuers and emerging growth companies under the JOBS Act, please take a look at our April 2012 Public Companies Alert.
Holland & Knight is a global law firm with more than 1,000 lawyers in 18 U.S. offices as well as Abu Dhabi, Beijing and Mexico City. Holland & Knight is among the nation’s largest law firms, providing representation in litigation, business, real estate and governmental law. Interdisciplinary practice groups and industry-based teams provide clients with access to attorneys throughout the firm, regardless of location.