Does the JOBS Act Help These IPOs?
Twitter's IPO this week is the most prominent example of a trend toward companies availing themselves of the Jumpstart Our Business Startups (JOBS) Act. More than a dozen other lesser known firms also went public this week, including Barracuda Networks, Wix.com, Arc Logistics Partners LP, and Mavenir Systems, among others. And most filed confidential IPOs, courtesy of the JOBS Act.
According to Renaissance Capital, 71 percent of all IPOs this year have come from companies that have filed confidentially. Some 200 companies are expected to go public this year, the most since 2007.
So why are so many filing confidentially? Timing. When it comes to taking a company public, timing is one of the most important factors. Prior to the JOBS Act, firms looking to file fell under mandatory disclosures that could make or break their IPO. Confidential filing affords companies more control over the timing of their announcement and even allows them to withdraw the offering without alerting investors.
This uptick in IPOs shouldn't surprise anyone, as it was what the JOBS Act was designed to do. The legislation stipulated that "emerging growth" companies, defined as firms with annual gross revenues of less than $1 billion, were entitled to reduced regulatory and reporting requirements under the Securities Act and the Exchange Act. The law also increased oversight and transparency and relaxed the rules to boost crowdfunding of start-ups.
"For business owners who want to take their companies to the next level, this bill will make it easier for you to go public," President Obama said as he signed the bill into law. "And that's a big deal because going public is a major step towards expanding and hiring more workers."
In my last column, I argued that Main Street is most concerned with economic growth, more so than any other issue. Small businesses and start-ups currently employ just over half of the private-sector workforce and have created nearly two-thirds of the new jobs in the U.S. over the past decade and a half, according to the U.S. Small Business Administration.
Helping entrepreneurs to take the leap from private to public can also be a terrific source of job creation.
"Start-up companies are almost solely the catalysts for job growth," said Robert Litan, vice president of Research and Policy at the Kauffman Foundation. "It is important for policymakers to understand the extent to which highly successful start-ups--those that are able and willing to access the capital markets to finance their growth--expand their revenue and employment once they do go public."
Shortly after the JOBS Act's passage, the Kauffman Foundation released a study that found nearly 1.9 million new jobs were forfeited over the previous decade due to a 70 percent decline in IPOs. The group also found that emerging growth-sized issuers grew employment by 135 percent in the five years following their IPO, which is the length of the IPO "On-Ramp" in the new law. Remarkably, they found that 92 percent of a company's total job growth occurs after its IPO.
No sector has availed itself of the JOBS Act more than biotechnology. During the 16 months prior to the passage of the JOBS Act, there were only 19 biotech IPOs. Since the JOBS Act went into effect, there have been 33, as of July 2013. This is great news for scientists who have been sitting on good ideas, for existing companies that now have more options, and for those looking for work. That's not even to mention the public benefit we all receive from the groundbreaking research these companies are conducting to innovate in medicine, advanced biofuels, and other technologies.
Jeff Vetter, co-chair of the securities and corporate finance practice at Fenwick & West recently told Silicon Valley Business Journal that he has personally worked on around 60 confidential IPO filings since the law went into effect, and it looks to only be picking up steam.
As I recently wrote, Twitter's S-1 revealed that it is breaking away from the norm of major Silicon Valley firms like Facebook, Groupon and Zynga by electing a one share one vote governance structure, rather than the increasingly common practice of supervoting stock for management control.
The S-1 also showed that Twitter's human resources department has been busy--900 of the company's 2,000 employees were hired since June 2012, a 90 percent increase. Interestingly, The New York Times recently reported that the Venture Capital Association says "about 90 percent of the job creation by companies that go public occurs after their IPOs, which, thus, play an extraordinarily important role in job creation."
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