Next SEC Chairman Can Prime IPO Pump

NEW YORK ( TheStreet) -- "I don't think more than a few IPOs have happened over the past couple of years below 500 million dollars."

That observation by Robert Kaplan, Jr. -- a partner with Kaplan Voekler Cunningham & Frank -- about the dearth of small initial public offerings by small and mid-sized U.S. businesses, is the best argument for the Securities and Exchange Commission and its next Chairman Elisse Walter to speed up the agency's rulemaking to implement certain aspects the bipartisan Jumpstart Our Business Startups Act, or JOBS Act, signed into law by President Obama in April.

The JOBS act is meant to spur investment in smaller companies by easing securities registration requirements and reporting requirements, while also opening up fundraising away from traditional markets by allowing entrepreneurs to raise up to $1 million through crowdfunding.

Going public without registering


The JOBS Act expands the exceptions to Regulation A of the amended Securities Act of 1933, enabling small businesses to raise up to $50 million in capital through public offerings every 12 months, without registering with the SEC. The old limit was $5 million.

Kaplan Voekler Cunningham & Frank partner Thomas Voekler says "the JOBS Act is getting back to main street investing and getting smaller companies listed on an exchange. We're talking about small to mid-sized companies being able to raise capital, which has been closed to them. The hope is that the SEC can continue the forward press on getting these rules out, to reduce the regulatory burden to raise capital, hopefully on a more Main Street, regional focus."

Sounds great, right? The JOBS Act had very strong support from both parties in Congress, with the Senate voting in favor by 73 to 26, while the House of Representatives voted 380 to 41 in favor, but the SEC is dragging its feet on the implementation of the law.

The SEC is required to implement its final regulations per the JOBS Act within one year of the bill's signing, which makes sense, considering that the bill is meant to jumpstart a very slow economic recovery. However, for Regulation A, Kaplan says "the market is hoping to see the rules finalized by the second quarter of 2014."

"They are coming up with a deadline in December for implementing their rules on crowdfunding," Kaplan says, "but their timeframes can be exceeded on a fairly regular basis. As far as hard time frames, the SEC has a lot of flexibility in complying or not complying with those time frames."

Kaplan adds that "for crowdfunding, my guess is you will see some delay, since there was a December deadline for some regulations," and the transition of SEC leadership from outgoing Chairman Mary Schapiro to current commission member Elisse Walter, "will slow things down."

The good news for the SEC leadership transition is that "there's not going to have to be an appointment and review process by the Senate" for Walter, who was previously confirmed by the Senate when she was appointed to the SEC, however, Walter's term as a commissioner ends in 2013, and it is not known if President Obama will designate her as the permanent Chairman, or whether Walter will agree to serve beyond 2013.

IPO Onramp


The "IPO Onramp" of the JOBS Act makes it much easier for small to mid-sized businesses to go public by relaxing for five years the reporting requirements for registered companies with annual revenue of less than $1 billion. Emerging companies are also allowed to do a "secret filing" in order to gauge interest and test the market for an IPO.

The good news for smaller companies looking to raise capital in the public markets is that this part of the legislation was effective immediately by statute.

Michael Zuppone -- a partner in the Corporate practice of Paul Hastings in the firm's New York office -- says that the IPO Onramp "also reduced requirements with respect to required financial statements and compensation disclosures, which were considered an immediate benefit. There were some fairly immediate SEC staff interpretations. So that element of the JOBS act seems to be functioning, with the benefits envisioned by Congress making their way into the marketplace."

An SEC rule proposal on advertising IPOs.


As required under the JOBS Act, the SEC on Aug. 29 proposed rules to eliminate the ban against general solicitation for most public offerings, meaning that securities issuers will now be able to use public advertisements in newspapers or on the Internet to spur interest from investors, although the issuer will be required to take "reasonable steps to verify that the purchasers of the securities are accredited investors."

"Accredited investors" are defined by the SEC as individuals or couples whose net worth "exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Or, if he or she has income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year."

While the new rule will curtail the potential pool of investors, freeing issuers to advertise the offerings is sure to help move capital to where it is needed.

Staying Local.


Another aspect of the JOBS Act that should make it easier for local businesses to attract capital is the easing of the rules that require companies with more than 500 shareholders to register with the SEC. Kaplan says that "the JOBS act has increased that number to 2000, as long as no more than 500 investors are classified as non-accredited investors. The SEC still has to make some rules over determining who is accredit and not."

The community based aspect of some of the new fundraising that will be allowed by the JOBS Act -- once the rules are implemented -- also promises to bring the "social media revolution" to investing. Companies will have an easier time building a loyal base of local investors, many of whom can also be customers.

"Raising money locally not only creates community involvement, it creates transparency that has eluded the local market, which has been limited to private investments," says Kaplan. "Private transactions meant that once the offering was closed, the company wasn't subject to reporting requirements. Now people are going to be involved, they are going to understand these businesses."

The sky is blue.

Each state has its own securities filing requirements, known as "Blue Sky Laws."

According to Zuppone, "the most significant decision for the SEC to make is what to do with the application of Blue Sky regulation, because there was a study as part of the JOBS Act, which indicates that if you have to qualify for an offering with 50 state Blue Sky regulators, nobody is going to take advantage of the new exemption."

"The SEC has the authority to make a policy choice to preempt the application of Blue Sky regulation to essentially present a 'one stop shop' for a filing to be cleared by the SEC and be offered in all 50 states," Zuppone says.

"It's easy enough for the SEC to retool its regulations, but at the end of the day it has to make that hard policy choice."

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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