JOBS Act Rewards U.S. Exchanges Amid Surge of CriticismDoni Bloomfield
A two-year-old U.S. law designed to make it easier for small companies has turned into a boon for the country’s stock markets.
The Jumpstart Our Business Startups Act has spurred 25 percent more U.S. initial public offerings annually, according to a research paper by economists at Penn State University and the State University of New York at Buffalo. That generates listing fees for the New York Stock Exchange and Nasdaq Stock Market, a rare bright spot for the industry amid allegations that trading venues favor some customers versus others.
“Listings drive revenue,” said Niamh Alexander, an analyst at Keefe, Bruyette & Woods in New York. Though the fees account for less than 15 percent of revenue, she said, “it’s very, very important to have growth in the number of companies listed, and to have a pipeline of IPOs coming on.”
The NYSE and Nasdaq Stock Market have reaped rewards from the law even as scrutiny of their business from regulators and lawmakers intensified this year. Rebates that exchanges pay to brokers for stock orders have been attacked in congressional hearings. New York Attorney General Eric Schneiderman is examining relationships between exchanges and traders, evaluating whether markets unfairly cater to some clients.
The law lets companies with less than $1 billion in revenue apply for initial stock offerings confidentially in order to keep proprietary data from competitors if they later cancel plans to go public.
The academic paper found that 90 percent of companies eligible to file confidentially with the U.S. Securities and Exchange Commission since 2012 have done so, among them prominent listings such as Twitter Inc. and GoPro Inc. The submissions must be made public 21 days before the company begins pitching its shares to potential investors.
The JOBS Act was critical to Aerohive Networks Inc.’s decision to go public, according to Gordon Brooks, its chief financial officer.
“It was very important,” he said in a phone interview. “Our initial filing with the SEC was confidential. It allowed us to have dialog with the SEC and their comments outside of the public disclosure.” The Sunnyville, California-based company started trading in March.
The 209 initial public offerings in 2013 were the most since 2007, according to data compiled by Bloomberg. The surging stock market has also fueled the rise in listings, with the Standard & Poor’s 500 Index climbing almost 40 percent since the bill was signed.
“It’s become the full-employment act for lawyers, because there’s no downside to filing,” said Alan Shapiro, general counsel at Everyday Health Inc., a New York-based company that went public this year. “Just say, ‘We’ll get it on file, we’ll track the market, and when the market is good you can go public.’ I’ve been watching the IPO market for almost 20 years, and there’s not a lot of rhyme or reason to when the window’s open and when it closes and why.”
There may be more benefits to come from the JOBS Act for NYSE’s parent Intercontinental Exchange Inc. and Nasdaq OMX Group Inc., owners of the only exchanges that list corporations in the U.S. The SEC is testing a provision called a trade-at rule that would encourage trading stocks on exchanges rather than rival venues, including dark pools, that have won market share.
NYSE worked to make the JOBS Act popular with both political parties in Washington, according to David Ethridge, head of the capital markets group at the exchange.
“We were very active in making that happen,” Ethridge said in a phone interview. Duncan Niederauer, then-chief executive officer at NYSE Euronext, was in the Rose Garden when Obama signed the bill on April 5, 2012.
Scott Cutler, global head of listings at NYSE, said that his company joined the JOBS Act lobbying effort to lure startups onto the Big Board.
“We opened up the reach that we had in Washington,” he said during an interview. “The reach that we’ve had in areas of advocacy, those have become pillars of how we service companies today.”
Nasdaq in particular has benefited from the increase in public offerings, with 59 percent of eligible companies that went public in 2013 joining that exchange, according to a study by Latham & Watkins LLP, a law firm that helped lobby for the bill.
“Listings is clearly the cornerstone of Nasdaq,” Nelson Griggs, senior vice president of new listings at Nasdaq, said in a phone interview.
A burst of biotech and pharmaceutical offerings has driven the IPO boom, according to Matthew Gustafson, an assistant professor at Penn State and one of the paper’s authors. There were more than twice as many biotech IPOs in 2013 than in any year since 2004, according to data compiled by Bloomberg.
Gustafson’s paper, which he wrote with Michael Dambra at SUNY-Buffalo and Laura Casares Field at Penn State, found that the JOBS Act boosted listings by 21 companies annually, a 25 percent increase compared with the average number of IPOs from 2001 to 2011. IPOs in other developed countries remained below their pre-2012 numbers, the authors found.
Though the law has been important, it can be hard to quantify the effect it’s had on listings, according to Jay Ritter, a professor at the University of Florida.
“Some of the increase in biotech IPOs is undoubtedly due to the JOBS Act, although the bull market for biotech stocks makes it difficult to tell how much,” Ritter said in an e-mail. The Nasdaq Biotechnology Index is up more than 150 percent since the end of 2011.
Still, even senior executives on Wall Street acknowledge recent legislation has been a gift to exchanges.
“We’re pleased to see that we’re going forward with pilots,” Robert Greifeld, Nasdaq’s chief executive officer, said on a July 24 conference call. “Regulation is moving in a positive direction. We’re not going to wait for that. We have plans in place.”
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