By easing the regulatory burden on domestic and foreign companies, the Jumpstart Our Business Startups (“JOBS”) Act enacted in 2012 aimed to boost domestic job creation, stimulate economic growth and facilitate companies’ access to capital.
While certain provisions have only just taken effect last year, companies have widely benefited from the initial public offering (IPO) “on-ramp” provision of the JOBS Act. Other provisions that affect private access to capital have seen mixed results, but nonetheless, have expanded the potential offering choices for companies seeking to raise capital. Ultimately, reduced compliance and disclosure requirements, along with more options to raising capital, have been a welcome change to companies and investors.
This alert portrays a brief picture of three JOBS Act titles and their influence in these past five years.
New Company Category
Effective upon JOBS Act enactment, a new category of “emerging growth companies” (“EGCs”) was created to provide an “on-ramp” to public capital. This new company category reduces compliance obligations during and for up to five years after an IPO by allowing such companies to initiate the IPO registration process confidentially, communicate with certain investors pre- and post-IPO registration filing, and disclose scaled-back financials. Generally, companies with an annual revenue of less than USD 1 billion qualify.
2016 EGC Statistics:
- EGCs accounted for 84% of the IPOs;
- Concentrated in pharma, tech, real estate, energy, financial services, and healthcare industries;
- Average offering size was USD 77.5 million (non-EGCs: USD 368.6 billion); and
- Average pre-IPO annual revenue was USD 39.2 million (non-EGCs: USD 1.54 billion).
EGC status has significantly shifted the IPO market: in 2016, one out of every five IPOs had an offering size of under USD 50 million, as opposed to one out of every ten IPOs in 2013. Companies in industries with longer return prospects, such as biotech, have benefited from going public earlier to side-step venture capital demand for shorter-term returns. Foreign companies also saw a jump of 5% in US IPOs within two years.
New Offering Relief
Effective as of July 2013, certain private offerings were relieved from their prohibition against general solicitation and advertising when seeking investors. Companies can elect to undergo this public-like offering in a certain private placement that does not limit the amount raised (commonly referred to as “Reg D” or more specifically, “Rule 506”). This private placement method is popular: it is used in 90% of private placements, while averaging an offering size of USD 87.8 million.
Nonetheless, companies are more commonly choosing, i.e. 95% by amount offered, to opt out of using the JOBS Act benefit of general solicitation under this private placement. One reason for opting out is the additional requirement on companies using general solicitation to verify the required “accredited investor” status of their investors. If companies do not use general solicitation, it is sufficient for an investor to self-verify, shifting liability away from the company. This private placement without general solicitation also pre-dates the JOBS Act, and thus, the non-use of the JOBS Act option may be a (very) slow evolution.
New Internet-Based Method for Fundraising
Effective as of May 2016, companies can now raise funds from the “average Joe” through an internet-based platform. Internet-based crowdfunding existed prior to the JOBS Act, but it was either limited to non-equity benefits or only to “accredited investors” with minimum investments, such as USD 1,000, or USD 10,000.
The JOBS Act Regulatory Crowdfunding (“Reg CF”) amendment allows smaller investors to take part in company financing, with certain limitations in
- offering amount – USD 1,070,000 in a 12-month period; and
- investment amount – 5% or 10% of an investor’s income if less or more than USD 107,000.
After one year of Reg CF, 118 companies have so far raised over USD 35 million. The average income of investors is USD 90,000 with about 75% of investments under USD 500. An additional interesting outcome has been the shift in capital among the states, as investors are typically located in financial hub states compared to companies that are also in states less associated as financial hubs. While USD 35 million is not a big splash in the private equity market, certain companies benefit from having this access to capital.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this client alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.