Most all the talk about the JOBS bill is about crowdfunding, seeding, and the ability to advertise private placements. In my mind, other provisions are the really big news for young companies.
Those are the expansion of the size limits for “Reg A” offerings, and the newly created “regulatory on-ramp.” Together, these have re-opened a door to capital that’s been boarded over and forgotten: small company public offerings. In a back-to-the-future way, companies with a proven model and modest revenues will have a new, realistic option for growth capital– one that doesn’t require capitulating to onerous terms from large funds, or begging bankers who prefer to make money by simply rolling over government securities.Reg A provides for “baby IPOs”. Generally, if your company has less that $1 billion in revenue (and if you’re reading this, I bet it does), you can go public with a streamlined set of filings and raise up to $50 million per year of debt and/or equity. Unlike the old cap, $5 million, that’s enough to do fund almost any newish venture.
Almost more important than the mere expansion of the size limits, however, are the refreshingly practical “regulatory on-ramp” provisions. These free growth companies from the most onerous public company filing and reporting requirements for up to five years. Crucially, they also liberate analysts and bankers from the far too restrictive rules (put in place after some real Wall Street abuses) which have effectively prevented small companies from generating the investor awareness necessary to make an offering successful.
There are other useful changes, too. Growth companies can now submit confidential drafts of their registration statements to the SEC for review and comment, for example. And they can “test the waters” for interest in their offerings by talking to institutional and high net worth investors before the registration is effective.
Of course, there are still all sorts of caveats, restrictions, filings, expenses, long- term consequences and major issues to consider (like, whether the stock will be traded on an exchange). Nor is this a magic wand: it’s a tool for companies with some success behind them and a real shot going forward. But all in all, “baby IPOs” suddenly look do-able and attractive once again.
Another part of the JOBS bill makes staying private much easier for companies with many shareholders; previously, companies with more than 500 holders were forced to register with the SEC, but now that limit is 2,000. That’s ironic simply because, with all the changes discussed above, there’s very much less reason to stay private: investors and employees alike would prefer to hold registered stock they can sell to anyone.