The JOBS Act in 2013: What’s really driving the IPO Market?
Congress passed the Jumpstart Our Business Act (JOBS Act) in April 2012 with the hope that it would accelerate the IPO market for emerging growth companies (EGCs), which would in turn create job growth and help revive the economy. Initially slow to deliver, the Act has inspired a great deal of speculation. Recent market trends, however, point to a clear upswing in IPO activity, with a significant increase in the second quarter of 2013.
According to data from IPO Watch, IPO listings jumped 82 percent (from 34 to 62) during the second quarter of 2013 compared to the first quarter of the year. Analysts say the increase has been bolstered by a growing number of growth-related industry sectors like biotech firms, which outpaced all other industry groups in the number of IPOs filed and the amount of capital raised in second quarter of 2013. Other leading industry sectors entering the IPO pipeline include financial services, technology and healthcare services.
Some financial analysts say this upswing has more to do with overriding economic factors rather than the legislation itself. The JOBS Act offers a few key benefits for EGCs looking to file initial public offerings, including Confidential S-1 Filing to the SEC and the Testing the Waters provision (exemption for all early communications with qualified institutional buyers or institutional accredited investors). The JOBS Act provides further flexibility by loosening key provisions of the Sarbanes-Oxley and Dodd-Frank acts, such as the ability to avoid making disclosures on executive compensation (or holding a “Say on Pay” vote) for up to five years. Most recently, the Confidential Filing provision has been utilized for IPO filings in developing sectors, especially those who are less profitable and looking to submit offering documents without having to publicly share information with competitors.
While there’s no question that a majority of EGCs are taking advantage of these provisions, experts say that may not be the reason behind their IPO success. Instead, the real determining factor seems to be how investors view the company’s potential to expand, as well as an improvement in stock market and economic conditions. Experts also cite greater risk-taking among investors and early gains in a stronger equity market as reasons behind the increase in IPO activity.
The case of Fairway Group Holding Corp.’s recent IPO success points to this theory; investors poured hundreds of millions of dollars into the upscale grocery store last April, believing it had potential to expand into a national chain. The company’s stock value has since skyrocketed and shows no signs of slowing. Fairway did qualify as an EGC and took advantage of both of the aforementioned disclosure provisions, but that may have had more to do with the company wanting to keep certain financial information private which could of lead to a dip in investor confidence.
Critics of the JOBS Act have been quick to use the Fairway case as an example of why the legislation was flawed to begin with, calling it an attempt by Congress to respond to the failing economy and create jobs. Initial enthusiasm about the Act has dwindled among industry leaders as well. According to a 2013 BDO IPO Halftime Report, just 14 percent of capital markets executives at leading investment banks believe that the JOBS Act has made a positive impact on increasing the number of businesses going public. A year ago, over 50 percent predicted that the Act would have a positive impact on U.S. IPO activity. Fifty-eight percent of executives this year do not believe the act has had a positive effect, while 28 percent said it’s still too soon to tell. Of those who were unsure, over two-thirds (68%) said the law will never actually achieve its intended goal of increasing the number of businesses going public.
The BDO Survey also identified several threats facing the IPO market during the remainder of 2013. According to the poll, global, political and financial instability was the most cited threat (64%), followed by constrained bank lending (18%), high unemployment (9%) and the sequester and related government spending cuts (9%).
Industry leaders and analysts will be watching carefully throughout the remainder of 2013 to see how the JOBS Act affects U.S. IPO activity. While an increasing number of companies (such as biotech and other emerging growth industries) have benefited from the law’s confidentiality and testing the waters provisions, the recent surge in IPO filings may have more to do with investor confidence and economic factors rather than just the law itself.
About the Author
Jennifer Sharkey is a Senior Vice President at William Gallagher Associates and Leader of the firm’s ExecutiveRisk Practice. She is responsible for the strategic and tactical leadership of this practice by providing consulting, marketing and negotiation expertise on Directors’ & Officers’ Liability, General Partnership Liability, Private Equity/VCAP, Fiduciary Liability, Fidelity, Kidnap/Ransom & Extortion, Employment Practices Liability and Professional Errors & Omissions Liability.