In a broad bipartisan vote of 390-23, the House of Representatives today passed legislation written by U.S. Representatives John Carney (D-DE) and Stephen Fincher (R-TN) to make it easier for small and medium sized companies to undertake an IPO and become a public company. The legislation was the centerpiece of the JOBS Act (HR 3606), which includes other pieces of legislation that have already passed the House with overwhelming bipartisan votes.
Representative Carney is the first freshman Democrat to pass a major piece of legislation in the 112th Congress. The legislation is supported by President Barack Obama and is expected to be signed into law after passing the Senate.
Rep. Carney's legislation, the Reopening American Capital Markets to Emerging Growth Companies Act of 2011, would reduce the costs of going public for these companies by phasing in certain regulatory requirements. Over the last ten years, the number of companies going public has fallen dramatically, hurting the ability of small companies to grow, innovate, and hire new workers.
The legislation creates a new category of issuers, called "emerging growth companies," that have annual revenues of less than a $1 billion and following the initial public offering (IPO), less than $700 million in publicly traded shares. Exemptions for these "on ramp" status companies would end either after five years, when the company reached $1 billion in revenue, $700 million in public float, or issued $1 billion in debt. The Obama Administration supports the IPO "on ramp."
"Making it easier for small and medium sized companies to grow is a proven way to create jobs and improve the economy," said Congressman Carney. "This legislation will encourage more entrepreneurs to start businesses and allow more start-ups to become public companies. In Delaware, this will generate significant revenue for the state through new franchise fees."
The legislation will also make it easier for potential investors to get access to research and company information in advance of an IPO. This is critical for small and medium-sized companies trying to raise capital that have less visibility in the marketplace. Currently, there are regulations in place that make it difficult for investors to find the detailed research reports they need to make an informed decision about new companies.
The JOBS Act also includes five pieces of legislation that have previously passed the House. Provisions in those pieces of legislation would remove the regulatory ban that prevents small, privately held companies from using advertisements to solicit investors for private offerings; permit "crowdfunding" to finance new businesses by allowing companies to accept and pool donations up to $1 million without registering with the SEC; raise the offering threshold for companies exempted from registration with SEC; raise the threshold for mandatory SEC registration for companies from 500 shareholders to 1,000 shareholders; and raise the threshold of shareholders allowed to invest in community banks.
Background Information Reopening American Capital Markets to Emerging Growth Companies Act of 2011
1. Create a new category of "Emerging Growth Company". The bill would establish a new category of issuers, called "Emerging Growth Companies", who have less than $1 billion in annual revenues at the time they register with the SEC. These companies will have up to five years (or until they reach $1 billion in annual revenue, or issued $1 billion in debt) to comply with certain regulatory requirements. "On ramp" status is designed to be temporary and transitional, encouraging small companies to go public but ensuring they transition to full compliance over time or as they grow. Only an estimated 14 percent of companies and 3 percent of total market capitalization would be impacted if these provisions were in effect today.
2. Provide an "On Ramp" for Emerging Growth Companies by Leveraging Existing Scaled Regulation Approach. The scaled regulations are limited to those areas of compliance that are high cost and which do not compromise core investor protections or disclosures, and all of them build on existing scaled regulations. These include:
a. Section 404(b) of Sarbanes-Oxley. This is the requirement that public companies pay an outside auditor, in addition to auditing the financial statements, to attest to the company's internal controls and procedures. SEC studies have shown that compliance with Sarbanes Oxley costs companies over $2 million per year. All companies with market capitalization of less than $75 million are already exempt, because lawmakers and the SEC recognize the substantial burden this regulation imposes on smaller companies
b. Look-Back for Audited Financials. This bill would only require Emerging Growth Companies to provide audited financial statements for the two years prior to registration, rather than three years. This look back is already available to companies with market capitalization under $75 million.
c. Exemptions from Annual Votes on Executive Compensation Arrangements. The bill would also exempt Emerging Growth Companies from the requirement to hold a stockholder vote on executive compensation arrangements, including so-called "golden parachutes". The SEC already recognized the additional burden these requirements impose on small issuers by giving them an additional year to comply with the new rules.
3. Improve the Availability and Flow of Information for Investors. To increase visibility for emerging growth companies while maintaining transparency and consistency for investors, the bill would improve the flow of information about emerging growth companies to investors before and after an IPO. The proposals would update restrictions on communications to account for advances in modes of communication and the information available to investors. In particular, the bill would:
a. Close the information gap for smaller companies. Existing rules allow research on large companies to be provided continuously, but prohibits investment banks participating in the underwriting process from publishing research on emerging growth companies. This bill would allow investors to have access to research reports about emerging growth companies prior to the IPO. However, the bill would maintain other extensive protections in this area, such as Sarbanes‐Oxley Section 501 (addressing potential conflicts of interest that can arise when analysts recommend equity securities), SEC Regulation AC, the Global Research Analyst Settlement and disclosure requirements regarding potential conflicts of interest. These changes would address the current information shortfall by providing a way for investors to obtain research about IPO candidates.
b. Permit emerging growth companies to "test the waters" prior to filing a registration statement. The bill would permit emerging growth companies to gauge preliminary interest in a potential offering by expanding the range of permissible pre-filing communications to institutional and qualified investors. This would help emerging growth companies determine the likelihood of a successful IPO. Antifraud provisions of the securities laws would still apply, and a prospectus would still be required prior to any sale.
c. Permit Confidential Pre-Filing with the SEC. Currently, foreign companies are permitted to file registration statements with the SEC on a confidential basis but U.S. companies are not. Allowing U.S. companies to also pre-file on a confidential basis would allow the SEC to pre-screen the filing and provide feedback, expediting the process while allowing the company to avoid a premature filing.