JOBS Act Provides Access Road to IPO On-Ramp
By Timothy J. Keating
This new law contains all the elements needed to breathe new life into an IPO market that had been eviscerated over the past decade. It is an especially welcome tonic for the emerging growth companies that drive U.S. innovation, job creation and economic activity.
Among its key provisions, the JOBS Act creates a so-called IPO on-ramp that removes many of the roadblocks to going public that emerging growth companies have faced over the past decade due to a jumble of well-intentioned but ultimately misguided government regulations, including the almost universally loathed Sarbanes-Oxley Act (SOX) of 2002.Originally conceived in the wake of the Enron and Worldcom accounting scandals, SOX was intended to apply only to the 1,000 largest companies in the U.S. Yet, in a fit of last-minute regulatory zeal, Congress in its wisdom ultimately decided to apply SOX to all U.S. public companies. That meant a company with $150 million of market capitalization was subject to the same reporting and compliance standards as Exxon Mobil (XOM), General Electric (GE) or Apple (AAPL). The collateral damage was the destruction of the U.S. IPO market. A research study published by Grant Thornton shows that between 1991 and 2000, the average annual number of U.S. IPOs was 530. Between 2001 and 2010, which includes eight years of SOX, that number dropped to 126. For emerging growth companies trying to take the next step in their evolution, the effects were even more devastating. In 1991, more than 80% of U.S. IPOs raised gross proceeds of less than $50 million. Today, it is completely inverted, with less than 20% of all IPOs raising less than $50 million. The JOBS Act seeks to right that wrong by easing much of the regulatory burden for companies with less than $1 billion in revenue that want to tap the capital markets via an IPO. In other words, the vast majority of companies wishing to go public: In 2011, only 15 out of 117 companies (13%) that completed an IPO topped the $1 billion of revenue threshold.
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