The Jumpstart Our Business Startups Act being signed by President Obama today will mean lighter-touch regulation for relatively small companies that want to go public. The idea is that they shouldn’t be held to the same bar initially as established public companies like IBM or Berkshire Hathaway, because their costs of complying are, proportionally, a much bigger burden. Among other provisions, the JOBS Act gives so-called emerging growth companies up to five years to fully comply with all the accounting rules required of public companies today. Critics, including the chairman of the Securities and Exchange Commission, warn such exemptions could eviscerate shareholder protections.
The law isn’t retroactive, at least not more than a few months: Companies that went public before Dec. 8, 2011, don’t qualify for the exemption. But if we apply the JOBS Act’s “emerging growth company” criteria to stocks now trading on U.S. exchanges, we can get a sense of the types of companies that would enjoy looser regulation under the law.
“Emerging growth companies” must have:
• less than $1 billion in annual revenue
• gone public not more than five years ago
• issued no more than $1 billion in debt
• floated no more than $700 million in stock
There are 328 companies that fit these criteria that have listed on U.S. exchanges, according to data compiled by Bloomberg. Of those, just about half (161) were trading above their IPO price at the market close on April 3, and about as many (163) were trading below. (Data for three listings were incomplete.)
The list includes hot tech companies like LinkedIn and Yelp. It’s also got Zipcar, Pandora, and Orbitz Worldwide, all well-known companies trading below their offering price. There are quite a few companies that probably won’t ring a bell for most retail investors.
A number were duds. A small regional airline called Gulfstream International went public in late 2007 and filed for bankruptcy three years later. The stocks of two Chinese companies probed by the SEC last year also went to zero. There are 20 companies based in China that fit the criteria, and only two of them now trade above their offering price; shares of eight go for less than $1.
Under the JOBS Act, “emerging growth companies” would have to report only two years of audited financial statements when they file to go public (existing law requires three now, and five years of some financial information, according to this analysis). And banks underwriting their IPOs may be able to issue research reports on the stocks ahead of the offerings, a practice prohibited a decade ago after analysts pumped dot-com stocks their firms were helping take public. For up to five years, companies that meet the new criteria will be exempt from certain disclosures dealing with executive compensation. They won’t have to have an auditor attest to their internal financial controls, a Sarbanes-Oxley rule put in place after the Enron-era accounting scandals.
Markets involve risk, and securities laws are designed to protect unsophisticated investors from taking risks they don’t understand. Loosening them may help more small companies go public. Some of them will turn out to be good investments, others won’t. Either way, investors will have less information to decide. Caveat emptor.