Part 4 of a series of posts on the JOBS Act
The so-called five-year “on-ramp” for young companies ready to file an initial public offering (IPO) is one of the most successful provisions of the JOBS Act of 2012.
The IPO On-Ramp, unlike most other provisions of the Jumpstart Our Business Startups (JOBS) Act, was part of the original act and did not require further rulemaking by the Securities and Exchange Commission.
Compared to other provisions of the JOBS Act, the IPO On-Ramp has been widely employed and considered easy to use. Nearly every tech or life science-based company that has filed an IPO since 2012 has used the confidential filing aspect under the provision.
The IPO On-Ramp is available only to “Emerging Growth Companies” or EGCs defined under the act. Those companies must have had less than $1 billion in annual gross revenue during their immediate preceding fiscal year.
The companies must also have made registered offerings of their common equity securities after Dec. 8, 2011 to be eligible for EGC relief under the JOBS Act. Companies filing before Dec. 8, 2011 are not eligible for that relief from previous SEC regulations.
Under the JOBS Act, EGCs operating under the five-year on-ramp receive the following benefits for their IPOs under the Securities Act of 1933:
- They may “test the waters” for interest in their IPO from high-net-worth investors who are “qualified institutional buyers” or “accredited investors” to ascertain the level of interest in that community before incurring the expense of registration.
- They can receive a “confidential nonpublic review” from the SEC of their draft registration statements rather than having to make the drafts available to the public in an electronic filing. This change preserves the company’s confidentiality while the review is ongoing.
- Prohibitions on “sell-side research” are eased under the act, and researchers may not impose “quiet periods” and other communications restrictions by research analysts connected with firms taking part in the offering.
EGCs in their first five years also receive compliance burden relief on audited financial statements and other auditing-related issues — which can be expensive — along with other reduced financial reporting requirements.
A big advantage of the IPO On-Ramp provision is that, if the IPO filing is withdrawn, the company has not damaged its reputation with a big public failure.
“Although few observers would attribute the recent comeback in the IPO market to the JOBS Act, the IPO On-Ramp has had a significant positive impact on startup offerings,” says a Sept. 19, 2014 online report on the IPO On-Ramp by Ward & Smith, Attorneys At Law.
“Confidential submissions have permitted Emerging Growth Companies to begin the arduous process of seeking SEC approval of offering documents without public disclosure of sensitive information. The ability to terminate the review without public disclosure has removed a huge downside to commencing the IPO process.”
A December 4, 2014 report by Business.com notes that one of the goals of the JOBS Act has been to stimulate startup activity and job growth by giving small companies easier access to capital. That seems to have been a success, with a 73-percent increase in IPOs since the adoption of the act, the report said.