The number of initial public offerings (IPOs), in which a company first offers its stock for sale on public exchanges, has skyrocketed during the first nine months of 2014. 220 companies went public during that time, raising about $77 billion. The record-breaking IPO of the Chinese company Alibaba alone raised $21.8 billion, but the vast majority of 2014 IPOs reportedly consist of “emerging growth companies” (EGCs), a category established in 2012 by the Jumpstart Our Business Startups (JOBS) Act. EGCs are smaller companies that have often been unable to meet the regulatory requirements for IPOs, but now they account for most or all of the growth in the number of IPOs in recent years.
The JOBS Act was introduced in Congress as H.R. 3606 in March 2012. It quickly passed both houses of Congress, and the President signed it into law that April. The law relaxes various regulatory requirements for smaller public companies and expands their eligibility to go public. It also increases, from 500 to 2,000, the number of record stockholders a company may have before it must register with the Securities and Exchange Commission (SEC).
The JOBS Act amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to include “emerging growth companies.” H.R.3606 §§ 101(a) – (b), 15 U.S.C. § 77b(a)(19), 15 U.S.C. § 78c(a)(80). An EGC is defined as a company that began issuing securities to the public after December 8, 2011, and that had less than $1 billion, adjusted for inflation, in annual gross revenues during the most recently ended fiscal year.
The JOBS Act provides relaxed regulations for EGCs for their first two to five years as publicly traded companies. That time period is known as the “IPO on-ramp.” EGCs can, for example, submit registration documents to the SEC on a confidential basis and delay initial filings of required reports. The confidentiality provisions allow smaller companies to avoid revealing trade secrets through public filings, in case they decide to withdraw the IPO.
The 220 IPOs during the first three quarters of 2014 were a significant increase from 2013, which had a total of 209. About 84 percent of 2014’s IPOs have been EGCs, and most of the growth in the number of IPOs during 2013 and 2014 has reportedly been due to EGCs going public.
The purpose of the EGC provisions of the JOBS Act was to expand access to IPOs to a wider range of companies, largely by lowering the costs through deregulation. Critics of the relaxed disclosure requirements for EGCs claim that a lack of transparency increases the indirect costs of going public while reducing the direct costs. This can be bad for both the companies themselves and investors. A study by business professors at the University of Virginia and elsewhere found that EGCs did not experience significantly reduced direct costs associated with IPOs, and that they experienced higher indirect costs through underpricing of their stock.
Business attorney Samuel C. Berger represents businesses and entrepreneurs in New York City and Northern New Jersey. We offer fixed-fee packages of legal services to our clients that cover a wide range of issues, which allows them to understand their rights and obligations and run their businesses efficiently and effectively. Contact us today online or at (212) 380-8117 to schedule a confidential consultation to see how we can help you.
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Photo credit: Luigi Novi [CC-BY-3.0 or CC-BY-3.0], via Wikimedia Commons.