JOBS Act allows companies to file confidential IPOs

Steven Loeb · May 6, 2012 · Short URL:

Number of known IPOs dropping rapidly, less than a third from a year ago

The Jumpstart Our Business Startup (JOBS) Act was signed into law a month ago, and the effects of the bill are already being felt, in ways both good and bad.

The law has a number of components that are designed to ease regulations on businesses that earn less than $1 billion in annual revenue, repeal conflict of interest laws and make it easier to raise money through crowdfunding.

Another part of the bill that has been getting some attention lately is the section that creates so-called “emerging growth companies.”

Essentially, the JOBS Act exempts companies that make less than $1 billion annually from having to conform to regulations for up to five years.

For example, these companies have looser regulations when it comes to being audited and how long before the company has to register with the SEC by raising the minimum number of shareholders it needs to have from 500 to 2,000. The point of these provisions seems to be that it will spur job growth by allowing companies more time to grow, thereby making it more likely that they will eventually go public instead of selling.

There is another aspect to emerging growth companies though, and this is where it gets a little trickier. The companies are now allowed to file for an IPO confidentially, meaning that they do not have to disclose anything about the company until 21 days before the start of its road show, where it will have to market itself to investors, if the company ever even decides to have one.

Here is the exact wording from the bill:

‘‘Any emerging growth company, prior to its initial public offering date, may confidentially submit to the Commission a draft registration statement, for confidential nonpublic review by the staff of the Commission prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the Commission not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in section 230.433(h)(4) of title 17, Code of Federal Regulations, or any successor thereto.”

What are the advantages?

For companies opting for confidential filings, they may choose this route to avoid scrutiny by investors. A company like Groupon, for example, who filed and was then publicly embarrassed when the SEC forced it to abandon its initial estimates, and revise its numbers down. Groupon may serve as a cautionary tale for all companies seeking to go public about what can happen to a company that puts itself out to be closely examined.

Confidentiality also allows the company to test the market. If the company had made its intentions public, and then found that they were not attracting investors as they had hoped, it could also lead to an embarrassing situation where the company might be perceived as weak. If the filing is confidential, they have as much time as they need without additional pressure.

The effect of confidential filings

So far the confidential filings have had the effect of slowing down IPO filings, or at least ones that the public is aware of. In April 2011, the number of IPOs filed with the SEC was 33. This year that number is 10.

This can make it more difficult for analysts to gauge the future market for IPOs given that only companies that find good investments will make themselves known. Otherwise, the company will have no reason to and may chose to withdraw its filing.

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