Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public

Brian P. O’Shea is Senior Director at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness. This post is based on a publication released by the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet, and the U.S. Chamber of Commerce.

In April, eight organizations—the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet, and U.S. Chamber of Commerce—released a report that included 22 recommendations for how to help more companies in the United States go and stay public. This report and recommendations stem from the shared concern of these organizations that the public company model has failed to keep up with the times, constituting a significant threat to long term economic growth and job creation.

In recent years, the steady decline in the number of U.S.-listed public companies has garnered the attention and concern of both market participants and policymakers. The United States is now home to roughly half the number of public companies that existed twenty years ago, while the overall number of public companies is little changed from 1982. [1] While the initial public offering (IPO) market has rebounded in recent years from its depths around the financial crisis, annual IPOs are still a fraction of what they were in the 1980s or 1990s.

This decline in IPOs and the increasing unattractiveness of the public capital markets comes at a significant cost—both in terms of job creation and economic growth, but also in terms of limiting investment opportunities for the vast majority of American households that are largely restricted from investing in private companies. A 2012 study by the Kauffman Foundation estimated that the 2,766 companies that went public from 1996 to 2010 collectively employed 2.2 million more people in 2010 than they did prior to going public, and cumulative sales among these companies increased by over $1 trillion during the same period. [2] And a 2010 study done by IHS Global Insight found that 92% of a company’s job growth occurs after it completes an IPO. [3]

Additionally, since Securities and Exchange Commission (SEC) accredited investor rules prohibit a vast majority of Americans from investing in most private offerings, Main Street households depend on vibrant public markets to create and sustain wealth for themselves. In that regard, the decline in public companies is not the only problem retail investors face today. For companies that do choose to IPO, there has been a trend towards companies going public later in their lifecycle, in effect reserving most early-stage returns for accredited or institutional investors. The Treasury Department raised concerns over these trends, noting in an October 2017 report that, “To the extent that companies decide not to go public due to anticipated regulatory burdens, regulatory policy may be unintentionally exacerbating wealth inequality in the United States by restricting certain investment opportunities to high income and high net worth investors.” [4]

While there is no single reason for why fewer companies in the United States are choosing to go public, there is broad agreement amongst market participants and policymakers that the rules and regulations which apply to public companies need to be modernized. To help address these issues, in 2012 Congress passed the Jumpstart Our Business Startups (JOBS) Act, which contained some of the most significant reforms to the IPO process and other regulations in years. Title I of the JOBS Act created an IPO “on-ramp” and established a new class of issuer—the emerging growth company (EGC)—defined as a business with less than $1 billion in gross revenue. By many measures, the JOBS Act had an immediate impact on the IPO market. For example, in 2013—the first full calendar year after the JOBS Act was passed—226 IPOs were listed in the United States (the highest number since 2004), followed by 291 in 2014. [5] While the IPO market has since cooled, the vast majority of companies that are going public are still doing so as EGCs.

But the JOBS Act only began what needs to be done to modernize the rules that apply to public companies. SEC Chairman Jay Clayton has prioritized finding ways to help more companies go public, stating in his first speech as Chair that

“The reduction in the number of U.S.-listed public companies is a serious issue for our markets and the country more generally. To the extent companies are eschewing our public markets, the vast majority of Main Street investors will be unable to participate in their growth. The potential lasting effects of such an outcome to the economy and society are, in two words, not good.” [6]

Several pieces of “JOBS Act 2.0” legislation have also advanced in Congress since 2012 as interest around the issue remains strong.

This inter-organizational effort to provide policymakers with recommendations to build upon the JOBS Act took shape over the last several months, and represents a number of ideas that will garner support from a broad spectrum of industry participants. The recommendations are broken into five general sections: 1) Enhancements to the JOBS Act; 2) Recommendations to help EGCs and small issuers gain more research coverage; 3) Improvements to certain corporate governance, disclosure, and other regulatory requirements; 4) Recommendations related to financial reporting; and 5) Equity market structure recommendations.

An outline of the recommendations is included below, with the full report available here. Our organizations hope that this report will serve as a baseline for future Congressional and SEC action to modernize our nation’s public capital markets.

Enhancements to the JOBS Act

  • Extend certain JOBS Act Title I “on-ramp” provisions (e.g. streamlined financial disclosure, exemptions from Dodd-Frank executive compensation requirements, allowance for confidential reviews of registration statements) from 5 years to 10 years.
  • Amend Section 5(d) of the Securities Act of 1933 to permit all issuers to “test the waters” with potential investors that are qualified institutional buyers (QIBs) or institutional accredited investors to determine interest in a securities offering.
  • Extend the JOBS Act exemption from Section 404(b) mandates of the Sarbanes-Oxley Act from 5 years to 10 years for EGCs that have less than $50 million in revenue and less than $700 million in public float.
  • Remove counterproductive “phase out” rules that increase the complexity and uncertainty regarding EGC status.

Recommendations to encourage more research of EGCs and other small public companies

  • Amend Rule 139 under the 1933 Securities Act to provide that continuing coverage by research analysts of any issuer (as opposed to only those that qualify for Form S-3/F-3) would not be deemed to constitute an offer or sale of a security of such issuer before, during or after an offering by such issuers.
  • Allow investment banking and research analysts to jointly attend “pitch” meetings in order to have open and direct dialogue with EGCs. A holistic review of the Global Research Analyst Settlement should also be conducted.
  • The SEC should examine why pre-IPO research has not materialized following passage of the JOBS Act and develop recommendations to help more companies gain research coverage.

Improvements to certain corporate governance, disclosure, and other regulatory requirements.

  • Institute reasonable and effective SEC oversight of proxy advisory firms
  • Reform shareholder proposal rules under Rule 14a-8 of the Securities Exchange Act, in particular by raising the “resubmission thresholds.”
  • Simplify quarterly reporting requirements and give EGCs the option to issue a press released with earnings results in lieu of a 10-Q.
  • Policymakers should continue efforts to modernize corporate disclosure, scale certain requirements for EGCs, and maintain the longstanding “materiality” standard.
  • Allow purchases of EGC shares to be qualifying investment for purposes of Registered Investment Adviser exemption determinations.
  • Amend Form S-3 to eliminate the “baby-shelf” restrictions and allow all issuers to use shelf registration Forms S-3 and F-3.
  • The SEC should address abuses or unlawful activity related to short sales.
  • Amend Rule 163 under the 1933 Securities Act to allow prospective underwriters to make offers of well-known seasoned issuer securities in advance of filing any registration.
  • Make XBRL compliance optional for EGCs, smaller reporting companies (SRCs), and non-accelerated filers [7].
  • Increase the threshold for mutual funds to take positions in companies before triggering diversified fund limits from current 10% of voting shares to 15%.
  • Allow disclosure of selling stockholders to be done on a group basis under Rule 507 of Regulation S-K even if each selling stockholder is not a director or named executive officer of the registrant and holds less than 1% of outstanding shares.

Recommendations related to financial reporting

  • The SEC should consider aligning the SRC definition with the definition of a non-accelerated filer after the careful study of the costs and benefits of such an approach that the rulemaking process affords. The SEC should also institute a revenue-only test for pre or low revenue companies that may be highly valued.
  • Modernize the Public Company Accounting Oversight Board (PCAOB) inspection process related to internal control over financial reporting (ICFR).

Recommendations related to equity market structure

  • Intelligent tick sizes should be examined as a way to help improve trading for EGCs and small capitalization stocks.
  • Allow EGCs or small issuers with distressed liquidity the choice to opt out of unlisted trading privileges (UTP) to help concentrate liquidity and reduce fragmentation.

The complete report is available here.

Endnotes

1“America’s Roster of Public Companies is Shrinking Before our Eyes.” Wall Street Journal January 6, 2017. https://www.wsj.com/articles/americas-roster-of-public-companies-is-shrinking-before-our-eyes-1483545879(go back)

2Kauffman Foundation, Post-IPO Employment and Revenue Growth for U.S. IPOs June 1996-2010. https://www.kauffman.org/what-we-do/research/2012/05/postipo-employment-and-revenue-growth-for-us-ipos-june-19962010(go back)

3IHS Global Insight, Venture Impact Study 2010(go back)

4“A Financial System That Creates Economic Opportunities,” pursuant to E.O. 13772 on Core Principles for Regulating the United States Financial System(go back)

5 https://www.sec.gov/info/smallbus/acsec/giovannetti-presentation-acsec-021517.pdf(go back)

6Remarks at the Economic Club of New York July 12, 2017 https://www.sec.gov/news/speech/remarks-economic-club-new-york(go back)

7This recommendation supported by U.S. Chamber, Biotechnology Innovation Organization, Equity Dealers of America, American Securities Association, National Venture Capital Association, Nasdaq, TechNet(go back)

Trackbacks are closed, but you can post a comment.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows