The JOBS Act: IPO on-ramp or public company off-ramp?
By Brian Hamilton, CEO and co-founder of Sageworks Inc.
A key part of the JOBS Act recently signed by President Obama has been described as creating an “IPO on-ramp” that makes the process of an initial public offering easier and more attractive. In fact, many of the Act’s provisions grew from a task force appointed by the Treasury Department to address a decline in the number of IPOs in recent years.
No doubt many companies contemplating an IPO will race to the public markets as a result of the new law, and we may see a bumper crop of IPOs in the short term. Special rules for small, fast growing companies will ease certain financial reporting requirements and will allow them to work with the SEC confidentially before filing public registration statements.
But I believe the JOBS Act as a whole will probably continue the momentum away from companies going public. While there are pieces of the new law that will encourage public listings, other aspects will reinforce the ability of companies that want to stay private to do so while giving others new options for raising capital outside of public markets.
This would continue a trend that began in the late 1990s. The number of publicly listed companies on U.S. exchanges has fallen from 8,823 in 1997, at the height of the dot-com boom, to under 5,000 at the end of 2011, according to the World Federation of Exchanges.
Financial distress led to many delistings during and since the Tech Bubble and recession. Many people blame Sarbanes-Oxley and other government regulations for becoming onerous, resulting in public companies going private or being delisted, or dissuading smaller private firms from public offerings. Others, such as accounting firm Grant Thornton, have argued that changes to the market structure – such as online brokerages, further separation of equities research from investment banking – have eroded the financial underpinnings of the systems that provided support for small capitalization stocks.
Whatever the cause, it’s clear that millions of companies are staying private and many that were once public have been taken private. Meanwhile, the number of IPOs in the U.S. each year has declined. More companies held IPOs between 1996 and 1997 than in the entire decade between 2001 and 2011.
Several aspects of the JOBS Act will help companies that want to stay private do so, even if they previously were on the cusp of being forced to go public. For example, many smaller, privately held banks used to worry about triggering public reporting requirements when they crossed a threshold of 500 shareholders, the Wall Street Journal reports. That trigger under the JOBS Act is now as high as 2,000 shareholders.
At the same time, the law paves the way for small- and medium-sized companies to gain access to new sources of capital (up to $1 million in a 12-month period) without going to the public markets but by using a “funding portal.” While “crowdfunding” is still a huge question mark in many ways, in terms of its impact on private companies, this piece of the JOBS Act is the most significant. Private companies will be able to tap into a huge market of investors who are not currently available to them and will be able to raise money from individuals who are not “accredited” without going public. This means that investors who have not been considered wealthy enough by the SEC to be designated an accredited investor will now be able to make direct equity investments in private companies.
It would be hard to overstate the implications of this piece of the new law, as it allows small investors new investment opportunities – though not necessarily better ones. Additionally, it gives private companies access to millions of dollars they couldn’t previously tap into. It introduces some risk for a new class of investors, but it is very positive for private companies.
As long as there is capital available to help businesses expand, from whatever source, it is not necessarily a bad thing that the momentum continues away from public companies. Out of the 27 million businesses in America, most are already privately held, and they drive the lion’s share of economic growth and jobs.
A common mistake among young entrepreneurs is when they think the viability of their fledgling company depends on their ability to intrigue investors and raise capital. What really separates a good company is the quality of the product – not the money backing the company, which is why I encourage managements to spend most of the time discovering how to develop their great idea with limited capital.
Eventually, though, capital can be an integral part of expansion. It allows companies to keep hiring, which is positive for the economy and good for the business, so long as it helps them increase sales and profits.
Companies will always need capital, and investors will always want investments, so as long as there are available avenues for both, the decline in the number of public companies shouldn’t be a big issue.
ABOUT BRIAN HAMILTON
Brian Hamilton is the co-founder and Chief Executive Officer of Sageworks, an Inc. 500 company. He is an original co-developer of FIND (Financial Information into Narrative Data), Sageworks’ patented artificial intelligence technology which converts financial numbers into plain-language reports. “FIND” is the basis of ProfitCents® and Sageworks Credit Analysis®, applications that are used to analyze private company financial information by thousands of financial institutions and accounting firms throughout North America and the United Kingdom.
Brian holds an MBA from Duke University and a bachelor’s degree from Sacred Heart University, where he graduated summa cum laude. He is a noted expert on privately held companies who is regularly quoted in most major national media outlets. He is currently a guest columnist for Forbes and Inc. Magazine. Brian also oversees Inmates to Entrepreneurs, a community outreach program focused on teaching ex-offenders to start low capital businesses upon their release.