While the Jumpstart Our Business Startups (JOBS) Act of 2012 has helped pave the way for entrepreneurs and investors to launch startups by easing regulatory burdens, experts testified Wednesday at a House subcommittee hearing that roadblocks remain on the IPO on-ramp.
The JOBS Act was passed with bipartisan support and signed into law in 2012 by former President Obama. It was designed to provide companies with greater access to investors and capital along with a relaxed regulatory burden that seeks to ease the path for companies to go public. One of its provisions allows companies to raise capital through crowdfunding.
“There is no doubt that the JOBS Act did ease some unneeded structures that applied to public companies. Still, despite these improvements and the benefits of going public to private companies, their employees and the investing public, many private companies remain reluctant to take the next step and go public,” Edward Knight, general counsel and chief regulatory officer at Nasdaq, said at the House Financial Services Committee’s Capital Markets, Securities and Investment Subcommittee hearing.
In his testimony, Knight said many private companies view the public markets as too costly and overburdened by regulation. “If you asked a Silicon Valley accomplished lawyer who takes companies public a few years ago what the rule of thumb was in terms of revenues for a company before they go public, they would have said $30 million. Today they would say $100 million.”
“The infrastructure that you need to support all the reporting requirements and the regulatory requirements … and I’m not talking about the financial disclosure. No one is arguing about financial disclosure. That is a key to a well-run market and protecting investors,” Knight added. “It is the other public policy goals that have been put on the public company model that makes the market look uninviting by a CEO or a board who is considering options. The environment does not look very inviting, particularly when you have $8 trillion in sovereign wealth funds available to invest in these companies as private companies.”
Knight said there’s nothing wrong with a vibrant private market, but the public markets need to be robust too and should be modernized.
“Many of the issues that we’re talking about on this panel are regulatory issues that haven’t been revisited in 20 years,” Knight said. “We’re not talking about getting rid of them, we’re talking about modernizing them. We’re not talking about getting rid of disclosure, we’re talking about bringing it into the 21st Century where there is electronic disclosure.”
In his remarks, U.S Rep. Bill Huizenga (R-MI), subcommittee chair, said, “Let’s continue to build upon the success of the bipartisan JOBS Act by further modernizing our nation’s securities regulatory structure to ensure a free-flow of capital, job creation, and economic growth. It’s time to get the federal government working to support innovation and reward hardworking Americans.”
The United States has about half the number of public companies as it did 20 years ago, and only slightly more public companies than existed in 1982.
Thomas Quaadman, executive vice president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, said the decline in public companies is a real concern. He cited a survey where 92 percent of public company CEOs said the administrative burden of public reporting was a significant challenge for their company becoming public.
“This is a tragic outcome for our economy, particularly given the body of evidence which shows that both job and revenue growth increase significantly once a company goes public … Whatever the exact economic consequences may be, it is indisputable that fewer public companies means less jobs, less growth, and less opportunity for American businesses and American workers,” Quaadman said.
He added: “And while the on-ramp provisions included in Title I of the JOBS Act have helped increase the number of IPOs in the immediate years following passage, the market has since cooled and many long-term issues still remain.”
However, Brian Hahn, chief financial officer at GlycoMimetics, testified that the JOBS Act has been successful and has improved capital formation.
“Since the JOBS Act was signed into law five years ago, 212 emerging biotech companies have used provisions in the law to go public. For comparison, there were just 55 biotech IPOs in the five years leading up to the JOBS Act,” Hahn said.
“The ability of growing businesses to access the public markets, as supported by the JOBS Act, is of paramount importance to biotechnology innovation because investment capital is the lifeblood of scientific advancement. It costs over $1 billion to develop a single life-saving treatment, and most companies spend more than a decade in the lab before their first therapy is approved. During this long development process, virtually every dollar spent by an emerging biotech comes directly from investors,” Hahn added.