While this provision was touted as a way of opening the IPO market to EGCs, it has had no noticeable effects. While we have seen these companies making use of the confidential submission process, the number of filings has been disappointing. IPOs of EGCs in the year since the law was enacted fell 21 percent, to 63 from 80 in the year prior, according to University of Florida Professor Jay Ritter, who has done extensive work on the IPO field. And, as we have not seen a spike in small IPOs as many were hoping for, many have pointed blame on the specific implementation of the JOBS Act.
However, the problem may not stem from the way this provision was implemented, but instead from the very premise of the provision. In other words, it might be that it was never the cost of regulation—increased by the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010—that deterred smaller companies from going public to begin with. And without more structural changes, the JOBS Act as it stands may not be able to solve some of the issues facing the US IPO market.
Columbia Law School Professor John Coffee wrote a compelling piece in the New York Law Journal earlier this year outlining that the lower IPO issuance has little to do with the JOBS act. In addition to the potential propensity for smaller companies to sell out to a larger company, he cited a number of other drivers including potential loss of investor confidence in the market as a result of a variety of shocks, not to mention that the "ecosystem of IPOs" may not as suitable for small businesses, particularly as institutional investors (who are the largest purchasers of IPOs) tend to prefer larger companies with higher liquidity.
Paul Bard, Vice President of Renaissance Capital
noted that we are, just recently, finally seeing a recent pick-up in filing activity of EGCs. But he added that "this could be merely a reflection of pent-up supply," as we know the backlog has been large for quite some time, along with "the re-opening of the IPO window given where the market is."
The reality is that smaller IPOs are challenged in the current market structure from a size and liquidity perspective and there is nothing in the JOBS Act's current form to specifically address those issues.
As Bard adds, "Ultimately, the JOBS Act might motivate a handful of companies to move forward with an IPO that otherwise wouldn't, but it is unlikely to have any broad sweeping impact on IPO volumes. IPO activity is ultimately dictated by the buyers, which means IPOs need to be of a certain quality and produce attractive returns for investors."
Solutions then? Ultimately, the focus needs to be on restoring investor confidence. And Professor Coffee suggests in his article Dutch Auctions to reduce the total underwriting costs to the issuer and restricting selective disclosure at roadshows versus the deregulation efforts of the JOBS Act IPO provision.
Second, on the "slow to implement side"
Two other measures that have received criticism are ones that have not yet been implemented, focused on smaller growing companies having trouble accessing capital. Title II and Title III of the JOBS Act, the two measures in focus, aim to allow these smaller companies to raise money from their customers as well as the broader public.
Title II allows companies to market their securities online although they can only sell to accredited investors. This general solicitation provision aims to allow companies raising money to broadly advertise their offerings. This in particular has been much more politically fraught than anticipated, as can be seen on the comments pages on the SEC website. Some are worried that there will be high-pressured sales efforts made.
Title III, which allows non-accredited (investors making less than $200,000 per year) and accredited investors to buy securities in private companies, has not even gotten to the point of proposal by the SEC. Here, many are concerned about potential fraud on unsophisticated investors. Some comments can be found here on the SEC website:
These complaints are supplemented by many outspoken opinions against their implication, including an op-ed from Steven Rattner in the New York Times
Ultimately, the delicate balance between too little regulation (and the consequence of outsized risk) and too much regulation (stifling innovation and competition) is key—and setting up the right measures are important to make this bipartisan act a successful one.
Crowdfunding sites have sprung up in anticipation of these measures being rolled out, but have not yet been put to use.
While many have pointed fingers at the SEC's slow-going ways with implementing these rules, others say that given a lot of flux at the agency—particularly with Mary Jo White coming in—delay is understandable.
Brian Goldsmith, who is co-founder of PubVest, a platform where growing businesses can sell securities online, said, "I think that the people who are going to be enforcing these rules want to have a hand in designing the way they are written. And I think that's smart. This is a big change, and it's more important for the industry that they get it right than that they do it fast." In the meantime, PubVest and its competitors will use the existing legal infrastructure to start raising capital for companies as soon as they can.
Sara Hanks, CEO of CrowdCheck
—created to do due diligence for crowdfunding sites said that while the SEC delays have not been ideal, she believes they will come through in due course and be constructive for small business. Ultimately, rules need to allow for transparency and background checks as well.
The bottom line: On the IPO side, the JOBS Act leaves much to be desired, and other provisions are likely needed to encourage smaller companies to warm up to public markets. On the private crowdfunding side, many of the initiatives could help in terms of effectively funding young companies, but, now with Mary Jo White finally coming in, it is time to get these underway.
Ultimately, while we are in recovery stage, with unemployment still above 7%, it is key to keep jobs growth fueled from younger, early stage companies. Equity crowdfunding could be one of the most impactful changes to the financial services industry in a long time. While the SEC has been slow to implement many of the measures, the rules also must be balanced, protecting both companies and investors. At this point, there is hope that this will come through in the near-term. But, especially now with Mary Jo White sworn in as the SEC's 31st chairperson, it is important to see some action. This is necessary in order to show that this wasn't just a push-through act that has a name everyone can love but underlying policies that aren't going anywhere nor are being embraced by the SEC.