Lifeline or Rising Tide? Understanding Emerging Growth Companies under the JOBS Act

Lifeline or Rising Tide? Understanding Emerging Growth Companies under the JOBS Act

Laws don't often get their own parties. But for the irresistibly named Jumpstart Our Business Startups (JOBS) Act, President Obama held a rare public ceremony in the White House's Rose Garden in its honor. Even more notably, this party was quite bipartisan-Republican House Majority Leader Eric Cantor stood right next to Obama as he signed the legislation. Since that day in April 2012, the most common criticism about the JOBS Act has been that it doesn't really exist yet. Many provisions, such as the more controversial element of the act allowing companies to raise financing through public "crowdfunding," are still undefined by the SEC. Other sections remain untested.

Now, almost a year after it was signed into law, the JOBS Act has, at least temporarily, quieted many of its critics. That's because its primary goal of giving some companies an easier path to completing an initial public offering (IPO) seems to be gaining traction.

Reasons for Popularity and Optimism

How so? First of all, the JOBS Act provisions are popular. Two-thirds of the U.S. exchange-traded IPOs in 2012 were by companies taking advantage of a new category of equity issuer established by the act: the "emerging growth company" (EGC). This designation provides options for lighter regulation such as exemptions from certain provisions of the Sarbanes-Oxley Act.

Second, in a year that was considered a poor one for public offerings, marred by looming fiscal cliffs (the only kind) and overhyped social media IPOs (the only kind), shares of companies that went public under the JOBS Act outperformed those of companies that took the more conventional route. That has prompted growing optimism that 2013 may be a turnaround year for IPOs and new business growth.

No matter how the year unfolds, one thing is certain. As outgoing SEC Chair Elisse Walter acknowledged recently, the JOBS Act signals a "seismic shift in the way companies, particularly small and emerging ones, raise capital and how individual investors participate in that process."

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