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It has been three years since Congress passed the JOBS Act in the hope that aiding “Emerging Growth Companies” would help create jobs. Among other things, the Act’s IPO on-ramp provisions were designed to encourage fledgling companies to go public, on the theory that that would boost employment. As discussed below, the legislation’s jobs creation track record is generally positive but also a little vague. There is no doubt, however, that the IPO market has been active since the Act was passed. Most of the companies that have gone public during that time have taken advantage of the Act’s IPO provisions, as detailed in a recent study also discussed below. But while there were more U.S. IPOs in 2014 at any time since the dot com era, IPO activity so far in 2015 is well off last year’s pace.
The JOBS Act’s IPO on-ramp provisions were designed to help emerging growth companies – firms with less than $1 billion in annual sales — to go public. The Act permits these companies to submit their initial filings to the SEC confidentially and to have expanded discussions with investors before the SEC has approved their offering documents. In addition, the eligible companies are relived from certain accounting and disclosure standards.
The purpose of these measures was to encourage job creation, and there appears to be some reason to think the Act has helped to spur employment. An April 3, 2015 Wall Street Journal article (here) reports that that “tens of thousands of related jobs have been created” by the Act, but “it’s a challenge to say just how many owe their existence to the bill.” The Journal says that the U.S. companies that completed offerings under the JOBS Act provisions added about 82,000 jobs since they completed their offerings, an increase of roughly 30% from their pre-IPO head counts.
However, attributing all of this job growth to the JOBS Act is a little questionable, since many of the companies would have gone public even if the JOBS Act had not been enacted. In addition, the impact if any has been concentrated in a few companies — more than 40% of the positions were created by just ten JOBS Act companies. The Journal article notes that “Economists say it is still too early to tell whether the law will lead to large-scale U.S. employment gains.”
While the Act’s impact on job creation may be uncertain, there is no doubt the Act’s IPO provisions have proven to be popular. The Journal reports that of the nearly 660 companies that have gone public since the Act became law, 539 companies (about 82%) have completed their IPOs under the JOBS Act’s provisions. Of those 539 companies, 454 were U.S. companies and 85 were domiciled outside the U.S.
It is certainly clear that the number of IPOs since the JOBS Act was enacted has jumped to the highest level in years. According to Renaissance Capital (here), 275 companies completed IPOs in 2014, compared to 222 in 2013 and just 128 in 2012 (the year the Act became law). The increased numbers of completed offerings are clearly due to the recovering economy and the healthy state of the equity markets. But even if the JOBS Act is not the direct cause of the increased IPO activity, its provisions are helping to facilitate the activity.
An interesting March 17, 2015 report from the Proskauer Law firm entitled “2015 IPO Report” (here) takes a very detailed look at last year’s IPOs, by focusing on the 119 U.S.-listed IPOs completed in 2014 with a deal size of $50 million or greater. The 144-page report analyzes these larger IPOs based on a number of criteria, including whether or not the offering priced in the target range; how many comments the SEC has about the companies’ offering documents; how much the companies incurred in fees and expenses; and how the companies fared post-offering.
The report also examines the extent to which the IPO companies took advantage of the JOBS Act provisions in connection with their offering. The report notes that of the 119 IPOs analyzed, 77% were emerging growth companies. 60% of the firms that qualified as emerging growth companies took advantage of the JOBS Act provision allowing them to submit only two years of audited financials and 52% took advantage of the JOBS Act provision allowing them to submit only two years of selected financial data. (Firms that do not qualify as emerging growth companies are required to include three years of audited financials and five years of selected financial information.)
The JOBS Act provision that the emerging growth companies really like is the Act’s provision allowing them to submit their draft registration statement on a confidential basis. Of the IPOs the law firm analyzed that involved emerging growth companies, fully 96% elected to submit their draft registration statement confidentially. The report also notes that on average, the emerging growth companies that submitted their draft registration statement confidentially made their first pubic filing 76 days after their first confidential submission and their offering priced 49 days after the public filings.
Interestingly, the report notes that a greater percentage of emerging growth companies priced above range than companies that did not qualify as emerging growth companies, and also that the emerging growth companies generally outperformed non-emerging growth companies.
Though 2014 was the most active year for IPOs since the go-go days of the dot com era, there are early signs that may suggest that the robust level IPO activity is waning, as noted in an April 3, 2014 Wall Street Journal MoneyBeat article entitled “Companies Saying ‘No’ to IPO” (here).
According to Renaissance Capital (here), through April 3, 2015, only 35 IPOs have priced year-to-date, a decline of 51% from this same point last year. The 34 offerings completed in the first quarter of this year is the lowest quarterly total since the fourth quarter of 2012, when there were 29 offerings completed. The decline in total offering proceeds for the year-to-date IPOs is even steeper. The 35 offerings completed through April 3, 2015 have raised a total of only $5.5 billion, compared to $12.6 billion raised as of the same date last year, a decline of 56%. The number of filings during the first quarter of the year was also off; the 49 filings in 1Q15 were the lowest quarterly number of filings since the first quarter of 2013 (when there were 36).
The Proskauer report suggests a possible reason for these declines. The report notes that there were important differences between the IPOs completed in the first half of 2014 compared to those completed in the second half. 45 percent of the second-half deals priced below range, compared to 25 percent of first-half deals. Second-half deals also generally underperformed first-half deals in the aftermarket. Either the quality of the deals declined during the year or investors lost their appetite for IPOs. Either way, the market for IPOs became tougher as 2014 progressed and we may be seeing the effects in the form of reduced IPO activity so far in 2015.
It is far too early to call the end of the current IPO wave. There is still a long way to go this year, and during the current wave the pace of IPO activity has ebbed and flowed a little bit. Even with the lower level of IPO activity in this year’s first quarter, the IPO pricings are on pace for 136 IPOs by year end, which would still be a higher number of IPOs than were completed in 2012. Renaissance Capital’s analysis of the current IPO market remains upbeat; in their 1Q15 IPO analysis (here), the firm said that “the solid performance of recent IPOs combined with a large active pipeline should support a more active second quarter.” But in light of the reduced number of IPO filings in the year’s first quarter, it does seem probable that there will be fewer IPOs completed this year than were completed in either 2013 or 2014.
As I have noted previously on this blog, increased IPO activity means increased IPO-related litigation. The year-to-date securities class action litigation filings bear this out, as eight of the 46 securities class action lawsuit filings so far this year (about 17%) have involved companies that completed IPOs in either 2013 or 2014. Given the usual lag between the IPO dates and lawsuit filings dates, we will probably continue to see significant numbers of IPO-related securities suit filings for some time. (There were, after all, 497 IPOs in 2013 and 2014.) But if the current slump in IPO pricings and filings continues, a decline in IPO-related litigation could follow.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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