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 Dale.Jensen@WeaverLLP.com.
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Although energy executives can’t control some factors that influence the IPO market — like economic conditions, global turmoil and interest rate changes — they certainly have the power to ensure their company’s readiness for the big event. Creating a scalable infrastructure well before a public offering not only helps private companies manage growth and thrive in a highly regulated environment, but it also ensures a smooth transition by imposing a diligent, sequential preparation regimen.
“Building a strong, scalable infrastructure helps private energy companies handle the growth that accompanies public registration in a well-managed, compliant fashion,” says Alyssa Martin, executive partner in advisory services at Weaver.
Smart Business spoke with Martin about the steps executives should take to proactively prepare their private energy company for an IPO.
Why is creating a scalable infrastructure the top priority?
You’ll crash if you try to build the airplane once you’ve left the ground, so energy executives need to proactively prepare their company for future growth by uniting people, process and technology to create a scalable infrastructure. Of course, it’s important to assemble an upper and middle management team of veterans with energy experience and public company expertise, but preparing for the event in an organized manner is vital, particularly in private companies that may have limited staff and resources. Otherwise, your team can become overwhelmed with trying to juggle their regular duties with a hefty list of complex, pre-IPO tasks.
A best practice is for senior management to create a roadmap to shepherd their staff through the daunting IPO preparation process, as well as enhance the private company foundation to become a company that is publicly fit.
What are the first steps in the IPO preparation process?
Start by enhancing your financial reporting capabilities so you understand the key critical risks and key performance indicators that drive the business. Timely, accurate and usable financial reports allow you to make informed business decisions, meet shareholder expectations and prepare accurate disclosure statements. In addition, the data will help you analyze trends and craft a strategy so you’re ready to answer questions from underwriters, attorneys and auditors.
These experts want to hear the story behind the numbers, including a description of the factors that drive the business up and down. They also want assurances that the company has the necessary procedures to comply with the regulations imposed on public companies.
Creating robust procedures is the next step because they emanate from the financial reporting system. The procedures will help you spot and report changes in control and material contracts, since public companies must demonstrate that they can comply with SEC reporting rules and stay ahead of disclosure requirements by creating a warning system that alerts them to reportable activities.
Once you have enhanced the financial reporting process and created robust procedures, its time to undergo a comprehensive risk assessment. A facilitated risk assessment not only helps your company comply with regulations like Sarbanes-Oxley, the risk analysis and response plan also allows your team to view the entire risk portfolio, agree on the priorities, and tackle mitigation and other related tasks in a logical manner.
It’s important not to overload employees during the IPO preparation or the early stages of implementing public company standards, since people can only initiate and absorb so much change at once.
How can private companies prepare for an IPO by instituting corporate governance practices?
Using external consultants to assess risk, conduct gap analysis and implement procedures helps private energy companies evolve from being lean, internally driven organizations to substantial, regulatory-driven public companies. Policies tend to be unstructured and undocumented in private energy firms, but internal audit consultants working under the direction of an audit committee can help institute written procedures and documentation guidelines.
This provides employees with a chance to form new habits and comply with governance practices well before an IPO.
How can private companies strengthen internal controls and IT systems?
In private companies, risk is usually managed at the process level based on comfort with the employee base. In public companies, it must be managed at the enterprise level first and then balanced through controls at the process level to comply with the strict guidelines for business operations and Section 404 financial reporting requirements.
Accordingly, it can take 12 to 24 months and a hefty financial investment for private companies to adequately strengthen their internal controls and IT systems to meet public company standards. Have internal audit consultants assess your internal controls, highlight areas of potential risk and provide recommendations for improvement. Then start early, so your IT staff has the bandwidth to implement the required changes while performing their regular duties.
Finally, facilitate a smooth transition by building control components into each step as you navigate the public company requirements.
Do you have any other tips to help energy executives prepare for an IPO?
Seek outside assistance and guidance before embarking on the journey from private to public status. External consulting experts who have travelled the path and understand your industry can help you navigate the process and reduce the chances of a false start. Prevent errors, costly rework and stress by tackling each step in the process logically and sequentially.
Finally, create a scalable infrastructure so your company is ready to handle the growth that accompanies public status.
Alyssa Martin, CPA, MBA, is an executive partner in advisory services at Weaver. Reach her at Alyssa.Martin@WeaverLLP.com or (972) 448-6975.
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NEW YORK - Investors eager to rush in on Pandora Media Inc.’s Wednesday stock listing may want to take a moment to figure out how the Internet radio service will make money in the years ahead.
Pandora shares will start trading in the wake of a spate of initial public offerings for Internet companies that have seen soaring valuations.
Oakland, Calif.-based Pandora priced its IPO late Tuesday at $16 a share, above its recently raised range of $10 to $12 a share, giving it a $2.6 billion valuation.
But at least one set of Wall Street analysts are skeptical if the largely advertising-supported Internet radio service can bring in the dollars to justify its price tag.
“It’s not that we think Pandora won’t be profitable; we don’t think that profits will be enough to justify the valuation,” said Richard Greenfield, an analyst at BTIG Equity Research.
Greenfield added that the IPO would be “more compelling” at a range between $4 and $5 a share.
The fear is that as more users start listening to Pandora on mobile devices rather than on traditional computers, the shift from online ads to less lucrative mobile audio ads might eat into advertising revenue. The problem is likely to grow as the number of listeners turning in on mobile devices increases.
The proportion of hours of Pandora music streaming to mobile devices rose to 60 percent last quarter from 4.6 percent in 2009, according to a Pandora filing.
The company said its advertising revenue last year was $119 million, 87 percent of total revenue. The rest came from subscribers who pay a premium for ad-free listening and other perks.
Pandora’s filing disclosed that “we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers.”
Pandora’s filing noted that audio and video advertising products better suited for mobile devices have not been as widely accepted by advertisers as traditional display ads.
Also a worry: royalty costs are set to rise in the next four years as its number of listeners grow.
One advertising executive acknowledged the drawbacks of mobile advertising.
“Online, Pandora can build a bigger brand experience by, for instance, featuring a banner message that takes over the entire screen,” said Sal Candela, director of mobile strategy for media agency PHD. “There isn’t the opportunity to do that on a Smartphone screen because of limited real estate.”
Candela, who has developed ad campaigns for clients on Pandora, said that mobile ads have their benefits, though — for example they can be tailored to consumers’ locations at a given moment.
But advertisers have only started to embrace mobile platforms as in the past year, said Candela. He added that mobile ad campaigns are harder to implement because the mobile market is cluttered with different devices.