Noodles & Co. IPO Side-Dish to Limp JOBS Act

So is it "basta la pasta" with all the hype?
By Ross Kenneth Urken ,

NEW YORK (MainStreetThe JOBS Act has garnered much criticism for its shortcomings in providing small businesses with the means to IPO. But Noodles & Co. (NDLS), which used its JOBS Act status as an emerging markets company to fatten up for a $75 million offering on June 27, appeared at first blush to be just the carbo-load the legislative initiative needed.

The Broomfield-Colorado-based pasta chain, which opened its first location in 1995, posted numbers that many heralded as a beacon of hope against all the JOBS Act naysayers: its IPO of 5.4 million shares were priced at $18 a share on June 27 and closed its opening day on June 28 at $36.75—a robust 104.2%.bump.

[Read: Small Business Growth Matters--The JOBS Act: One Year Later ]

The stock continued to roar, hitting a high of $51.40 intraday on July 3rd before selling off a bit after that.

But pastafarians may not be justified in crediting the JOBS Act; instead the initial pop shows simply that the company itself is a well-run differentiated restaurant concept with meaningful expansion potential, said Paul Bard, director of research at IPO research and investment firm Renaissance Capital in Greenwich, Conn.

"High-quality, growth companies had the means to go public prior to the JOBS Act, and they are really only availing themselves of the ability to file confidentiality under the new laws," Bard said. "The JOBS Act was designed to stimulate much higher levels of IPO activity, but it's hard to argue that it has been successful in that regard up to this point."

Noodles, part of the bullish market in the "fast casual" segment with competitors Chipotle (CMG) and Panera Bread (PNRA), has higher prices than standard fast food restaurants and the advantage of a full-service restaurant and table delivery without the expectation to tip. It's an affordable but appetizing niche with a more calorie-conscious bent than competitors that dovetails with health trends across the nation.

Comparisons to competitors would indicate a nutritious future: Chipotle went public in 2006 at $22 per share and is now at $382.52 per share.

The success of the Noodles share price may simply indicate increased hunger for high-growth IPOs in the second quarter and into the third of this year as the stock market rallies. Much of the increase in IPO activity, according to Bard, can actually be attributed to reduced volatility, rising equity markets and increased investor confidence—not the strength of the mechanics behind the JOBS Act.

That said, while it indeed may be unfair to credit the JOBS Act with having a hand in Noodles' success, it's also too early to bag the initiative as weak sauce. That's because the elements of the JOBS Act that will be game-changers for the markets and the economy are the unimplemented Title II and Title III of the legislation—which allow general solicitation of accredited investors and solicitation of non-accredited investors, respectively—according to Dara Albright, founder of NowStreet, a financial media, events and advisory company with expertise in the JOBS Act.

Noodles simply used Title I of the JOBS Act, which exempts smaller businesses from many of the financial control and reporting requirements instituted by Sarbanes-Oxley.

[Read: Amidst Employment Anxiety, Are the JOBS Act Haters Justified?]

"All that this rule does is help emerging companies like Noodles & Co. go public," Albright said, noting that larger strides are possible down the road. "Our capital markets are failing us not because companies need more help 'getting' public; they are failing us because there is no public market support for these smaller companies once they get there. Hence, the 'on-ramp' is not the problem, but rather it is the 'highway' that is."

It's difficult for smaller cap companies to thrive in a marketplace dominated by high frequency traders and inadequate aftermarket support, and that's where the infrastructure of Title II and Title III come in to play.

"Without re-establishing an ecosystem to support companies being public at smaller valuations by enthusiastic investors as opposed to detached traders, the demand will never be strong enough to meet the supply in the marketplace," Albright said.

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And that's just the difficulty in the dysfunctional—or rather, not fully functional—JOBS Act as it stands.

"The JOBS Act may offer some relief to very small companies from a compliance and process perspective, but it's impact to date on the number of IPOs has been marginal if at all from our vantage point," Bard said. "Small IPOs have been challenged in recent years in large part from a liquidity, trading and ownership perspective. The JOBS Act in its current form fails to address that critical issue."

--Written by Ross Kenneth Urken for MainStreet

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