Here Comes the JOBS Act
As Fei-Lu Qian reports in the current issue of The Pomerantz Monitor, on April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”), with the purpose of spurring job creation by improving access to the public capital markets for “emerging growth companies” (“EGCs”). The JOBS Act classifies start-up companies as EGCs until, for example, they generate $1 billion in annual gross revenues, or the fifth anniversary of their initial public offering (‘IPO’).”
The main goal of the JOBS Act is to make it easier for start-up companies to go public. IPO registration statements will now need to include only two years of financial statements, and only selected financial data will have to be provided for any previous period. Prior to an offering, an EGC will be able to expand communications and file with the SEC a draft IPO registration statement and amendments on a confidential basis, for its review and comment, and the EGC would not need to release those confidential filings to the investing public until just 21 days before the company’s IPO “road show.” Moreover, before filing a registration statement, an EGC will not be restricted to communicating only with qualified institutional buyers or institutional accredited investors. Perhaps most significantly, the EGC’s auditor will not have to certify the efficacy of internal controls and procedures under Section 404(b) of Sarbanes-Oxley.
Critics contend that the JOBS Act will lead to increased financial problems and fraud, and make it more difficult for shareholders to detect those problems. For example, an EGC will be able to resolve issues with the SEC without investors finding out about them until only 3 weeks prior to an IPO. Case in point: if the JOBS Act had been in effect prior to Groupon’s IPO, that company probably would have been able to resolve its accounting problems with the SEC without ever disclosing them to the public. Recently, Groupon disclosed that its executives failed to reserve enough money for customer refunds on expensive offers.
According to a survey conducted by the CFA Institute, a global association of investment professionals, only 29% of its members wanted the legislation to pass, and 63% believed that the bill “would create additional gaps in investor protection and transparency.” The Institute believes that the Act’s permission to allow brokerage firm analysts whose firms are underwriting an IPO to write and distribute research on companies “is a return to the kind of conflicted research that decimated investor confidence after the burst of the dot-com bubble.”