The Jumpstart Our Business Startups (JOBS) act was passed earlier this year, with the intent of making it easier for "emerging growth companies" to raise money in an initial public offering and through private placements. The peHUB article "The Unexpected Outcomes of the JOBS Act
" provides some insight as to the unexpected consequences of the Act. The article identifies the following:
- Special purpose acquisition vehicles are taking advantage of the confidential S-1 filing provisions of the Act. The Act was meant to help emerging growth companies, not SPAVs.
- Registration statements will add risk factors to address the reduced financial disclosures required by the Act. Basically, reduced disclosure means greater risk that some investors may not find the stock an attractive investment.
- The "testing the waters" provision of the Act, which allows companies to talk to investors prior to publicly filing an IPO registration statement, has mixed results so far.
Link to the article: http://www.pehub.com/161586/the-unexpected-outcomes-of-the-jobs-act/
The Wall Street Journal article "Lawmakers Push for Overhaul of IPO Process
" reports that lawmakers are calling on the SEC to overhaul the initial public offering process in the wake of the Facebook IPO. The crux of the letter seems to be that underwriters are able to "dictate" the price at which IPO shares are first sold to investors.
In my opinion, this is incorrect. The purpose of the IPO roadshow is to market the issue to institutional investors and to build the order book. Building the book is a process whereby the institutional investors give orders for a number of shares at a certain price. It is this process that the book-running underwriter determines the "market" price for the IPO. At the beginning of the roadshow, the underwriters establish a pricing range for the IPO, but this initial range is often shifted higher or lower depending on road show demand, and the final pricing is dictated by supply and demand. It is true that the price at which institutional investors buy IPO shares usually contains an "IPO discount" but this discount provides an incentive to all IPO investors to invest in these risky propositions. Also, in my view, investors purchasing stock in an IPO once it starts trading are basically bettors and are gambling that the stock price will go up. Stock prices are typically very volatile after an IPO and so these IPO speculators should bear the risks of their bet.
I believe the IPO process generally works well, and my thoughts on how to improve it relate to disclosure. I'm a big believer in disclosure as it helps the markets operate more efficiently. The more information, the better. To improve the IPO process, I would have all of the underwriting syndicate's projected revenue and earnings estimates for the company disseminated publicly so that all institutional and retail IPO investors are working with the same information. In addition, if the company revises guidance during the IPO process, this information should also be made public. Finally, while I'm on a roll, I believe that every IPO should disclose at least five years of annual and three years of quarterly financial and operating data, and that the metric "free cash flow" should be a required reporting metric.
Link to The Wall Street Journal article: http://online.wsj.com/article_email/SB10001424052702304441404577479024205961592-lMyQjAxMTAyMDIwMTEyNDEyWj.html#project%3DSECIPO%26articleTabs%3Darticle
The letter from Congress to the SEC can be found here: http://online.wsj.com/article_email/SB10001424052702304441404577479024205961592-lMyQjAxMTAyMDIwMTEyNDEyWj.html#project%3DSECIPO%26articleTabs%3Dinteractive
"Aqui-Hires" are acquisitions where the acquiring company (usually a larger company) is primarily acquiring the talent at the smaller company, usually a start-up. Michael Arrington, the founder of TechCrunch and now the founder of venture fund Crunch Fund, has written a very good article
that is posted on From the Crowd discussing a component of Aqui-Hires, being stock grants issued by the acquiring company to the key employees of the start-up at values that are often much greater than the acquisition price. The issue is whether the stock grants should be considered part of the overall price of the acquisition.
Why is this an issue? Because these Aqui-Hires often end in losses to investors of the start-up, and the start-up's investors may feel that they should share in the value of these stock grants.
It's an interesting issue, and Mr. Arrington's column explains it well. Here's the link: http://finance.fortune.cnn.com/2012/04/25/startup-investors-may-request-acqui-hire-protections/
has a good article about the impact of the new Jumpstart Our Business Startups (JOBS) Act on the tech IPO market. The article discusses how the Act relaxes certain regulations for "emerging growth companies" when going public, and explores other things like whether companies will ease the use of restricted stock grants. It also has links to summaries of the JOBS Act. Useful reading. Here's the link: http://allthingsd.com/20120405/how-will-the-jobs-act-affect-tech-ipos/
Andrew Ross Sorkin, the Editor-at-Large of NY Times DealBook
, has a post
discussing some of the potential downsides of the Jumpstart Our Business Startups (JOBS) Act, which when signed into law by President Obama, will make it easier for smaller private companies to go public by easing some of the requirements of Sarbanes-Oxley and other regulations. It's an interesting article that provides a different perspective on the JOBS Act. Here's the link: http://dealbook.nytimes.com/2012/04/02/jobs-act-jeopardizes-safety-net-for-investors/
Here are links to prior posts on the JOBS Act:
JOBS Fundraising Act to be Signed into Law on Thursdayhttp://www.allenlatta.com/1/post/2012/03/jobs-fundraising-act-to-be-signed-into-law-on-thursday-venturebeat.html
The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame: http://www.allenlatta.com/1/post/2012/03/the-jobs-act-is-good-but-sarbox-shouldnt-get-all-the-blame-greg-gretsch-post.html
Unintended Consequences of the JOBS Act: http://www.allenlatta.com/1/post/2012/03/unintended-contradictions-of-the-jobs-act-dan-primack.html
Fundraising Bill Passes Senate: http://www.allenlatta.com/1/post/2012/03/fundraising-bill-passes-senate-enables-crowdfunding-and-eases-ipo-regulations.html