Making the decision to become a publicly traded company is not easy for any company. The process can be cumbersome and expensive, and it’s not a decision that a private company makes lightly.
However, the Jumpstart Our Business Startups (JOBS) Act — signed into law by President Barack Obama on April 5 — may make that decision easier for companies that meet the definition of an emerging growth company (EGC). The law is designed to increase American job creation and economic growth by improving access to capital markets for companies.
“The premise of the act is to somewhat reduce the financial and regulatory burden of going public and to provide EGCs with avenues of communication that did not exist under the prior rules for the process of becoming a public company,” says Dale Jensen, partner-in-charge of the SEC practice group at Weaver.
Smart Business spoke with Jensen about what companies can expect from the newly signed JOBS Act and how it can help them on their journey to going public.
What are EGCs and how will the JOBS Act impact them in their quest to go public?
As defined by the act, an EGC is one that has less than $1 billion in total annual gross revenue. The act redefines the rules around accessing capital in the public markets for those companies defined as an EGC. The intent is to give them some advantages by reducing the burdens that, in the past, they had to overcome when going public.
Also, with additional changes in communications with the Securities and Exchange Commission (SEC) and certain allowable communications with qualified potential investors before filing documents, companies can better understand whether becoming public is the right choice for them.
What advantages does the JOBS Act bring to EGCs?
First, an EGC may submit a confidential draft registration statement with the SEC before going public to get feedback and work through initial comments on a confidential basis. Because the law is so new, the SEC continues to come out with additional guidance and clarification about the process.
Another advantage is that an EGC will only be required to have two years of audited financial statements, rather than the three years previously required.
Along those lines, the JOBS Act also delays the requirement for EGCs to have an auditor’s attestation to report on internal controls for up to five years, potentially. In addition, for the implementation of new or revised financial reporting standards, EGCs will be exempt until the time when such standards are required to be implemented by private companies.
Finally, there are other reporting exemptions for EGCs, such as permitting smaller reporting, scaled disclosures for executive compensation, which means significantly reduced reporting and disclosure requirements.
Will the creation of the JOBS Act lead to an increase in the number of publicly traded companies?
Possibly. The reduced burden and the new allowable communications with potential investors (qualified institutional buyers and institutional accredited investors) should enable more EGCs to become publicly traded companies. That said, the process to go public remains the same, but the reduced disclosure requirements and adjustments in the communication process with the SEC and investors should simplify the process and make it less cumbersome for companies that want to pursue that option.
However, with the increase in the number of shareholders a private company may have before it will be required to file with the SEC (increased from 500 to 2,000), there may also be increased opportunity for companies to remain private and raise additional capital. This could also provide an avenue for public companies that are currently below this threshold to exit the public markets.
What challenges of becoming a publicly traded company are not addressed by the JOBS Act?
An EGC needs to understand that even though there is a reduced cost burden of going public, it is still an expensive process. And, once the company has gone public, there is an increase in the cost and oversight related to being public.
Companies also need to consider whether going public is really the right decision for them. Just because the JOBS Act simplifies the process, does not mean that companies should move forward. Companies should consider the following questions: Do you have the organizational structure in place? Do you have the right personnel? Do you have the ability to do the necessary reporting? Are you organizationally ‘publicly fit?’
Finally, make sure you have the right partners in place — aligning with the right accounting and advisory firm and the right legal counsel is critical to a successful entrance into the public markets.
Dale Jensen, CPA, CFE, is the partner-in-charge of the SEC practice group at Weaver. Reach him at [email protected].
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