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The most important provision of the JOBS Act

When the JOBS Act was passed several months ago there was much fanfare about the key provisions. Especially the raising of the number of investors that a private company could accumulate before being forced to report as a public company and the so-called “crowdfunding provision” which allows companies to raise up to $1M of private capital from an unlimited number of investors (regardless of whether they are accredited or not). The Act also changed the rules around general solicitation and advertising for certain private capital raises and eased the regulatory burden on some newly public companies.

One of the provisions that didn’t get much attention but that I felt was perhaps the most important of the Act was the provision that allowed companies to privately file an S1 registration statement with the SEC. This provision only requires companies to make their filing public 21 days prior to commencing a road-show. Prior to this, S1 filings were public as soon as they were filed – allowing anyone to see the company positioning and financial results of a potential IPO candidate. And of course by publically filing an S1, a company was declaring openly its intent to go public. The SEC review process is typically around 6 months, meaning that companies have all the public and competitive overhead of being public with none of the benefits.

The JOBS Act changed that drastically. Now companies can file privately, run the review process with the SEC in secret and only declare their intent to go public as they finalize preparations to go on the road (in effect around 5 weeks before pricing their stock). And as was just reported, many companies are taking advantage of this provision of the Act. In fact, more companies have submitted private filings with the SEC than have submitted public ones – approximately 30 in total according to VentureWire.

And with no IPO coming to market since Facebook’s challenging debut, I’d imagine that a number of the companies who made their filings privately are glad they did so…

June 12th, 2012     Categories: Uncategorized     Tags: , ,
  • http://twitter.com/KyleBWeiss Kyle Weiss

    I wasn’t aware of the clause (or the ramifications), I really appreciate the insight! Does a 5 week window allow for enough “road time” or do you think there will be sticker shock with the public because of the shorter timelines?

    • http://www.sethlevine.com sethlevine

      Pricing talk never happens that far out, so there are no real ramifications of that kind that I can see. I think it’s a free pass for companies to both get comments back from the SEC and better gauge current market conditions before “declaring” their intent.

  • http://www.samedaydr.com/ Rich Weisberger

    Other benefits other than S-1 amendments while limiting advance information disclosure? I saw that a cantor fitzgerald co pulled their S1 only to refile under new rule.

    • http://www.sethlevine.com sethlevine

      Rich, I think secrecy (privacy) is the sole benefit – everything else is really a derivative of that.

  • G. Nagesh Rao

    So as a former USGer, me and my colleagues viewed the JOBS Act as a response to curtailing the regulations enforced by SarBox, Frank-Dodd, and Spitzer Decree.  All legislative or policy implementations in play due to some previous bad apples in the system (i.e. Enron, WorldCom, CountryWide, Bear Sterns, etc…). The pendulum shifts based on the moment of time and critical nature of the economy. With that said, this provision regarding S1 filings is very important (as you denoted), but what irks me a little bit is the ability for a company to be so secretive prior to filing. It is the result of these prior legal provisions that the public was able to render some understanding of Groupon and FB’s valuation (despite the snafus that occurred thereafter with info still being withheld). The point is how do we enact appropriate policy that ensures public confidence in the free markets and free markets that feel encouraged to work competitively but also fairly. It’s all about risk taking, when it comes to investing in a company but the public does have a right to figure out a truly appropriate “Beta-value” when taking that necessary risk to invest. Right?

    • http://www.sethlevine.com sethlevine

      Take a look at Spencer’s comment above. He argues (with merit) that really this provision guts some of the important “pre-public” work that companies have typically had to endure prior to truly becoming public. That and your post really make me wonder about why this provision was put in place (it was not something that was widely talked about prior to the Act being implemented; and to the point of my post, not really being widely talked about now). I am glad to hear from someone on the inside that there is active discussion around SarBox and some of the other bills in the past few years that have made being public much less tenable for smaller companies (I viewed the high profile debacles you refer to above more as enforcement issues rather than regulation ones).  Great comment – thanks!

  • Gordon Mohr

    Can they later withdraw the S1 in secret as well, or does withdrawing trigger a reveal that the earlier filing happened (including perhaps its contents)?

  • http://twitter.com/spencerrascoff Spencer Rascoff

    Hi Seth,
    Thought-provoking post, but I’ve got to disagree with your implied thesis, which seems to argue that this provision of the JOBS Act is a good thing. I, for one, think this provision of the JOBS Act is terrible. I feel that the public scrutiny that companies get when they’re on file is an important part of running the IPO gauntlet. It gives potential investors time to vet the company, time to do primary research, and time for the media to analyze the company’s prospects. This is particularly important for retail investors, who are already at an information disadvantage when it comes to investing. In Zillow’s case, I know that investors and analysts used the several month period when we were on file to go and do research on our product and to speak with our advertisers to get first-hand knowledge of how the product performed for our partners. This is valuable when evaluating a company’s prospects. If they had only had 3 weeks prior to the roadshow to dissect the S-1 and analyze the company, they would have had insufficient time to fully evaluate our prospects. In addition to investors who are harmed by the lack of transparency under these new rules, I feel that it is exceedingly unfair that existing public Emerging Growth Companies aren’t grandfathered into the same set of rules that private companies can now play by. It is unfair to impose different obligations on comparable companies once they have gone public, and, moreover, I see no investor benefit to doing so. 

    The only part of the JOBS Act that makes sense to me is that the # of shareholders who can own equity in a private company was increased above 500. The rest of it is a mistake in my opinion, and makes the capital markets less transparent. I wish more public company executives had spoken out against the JOBS Act before it got passed. But the bill’s sponsors wisely named it “The JOBS Act”, and no one wants to vote against “The JOBS Act”! And the rest of us were too busy running companies (or too afraid) to speak out against something that investment bankers, VCs, and other interested parties really wanted to see move forward. So now we have an uneven playing field; reduced investor transparency; and less public scrutiny of companies attempting to go public. All of these are bad outcomes in my opinion.

    Caveat: these are my own opinions, not necessarily my company’s (which doesn’t officially have an opinion on this issue.)

    • http://www.sethlevine.com sethlevine

      Fantastic comment, Spencer. I actually had not thought about the S1 secrecy issue from this perspective. In fact to be perfectly frank had only thought about it from my perspective as a private investor – and of course the flexibility it might give me to better time the public announcement of a filing to suit my own needs (typical VC, I know, only thinking of what it means to me…). I think the entire exercise of a company preparing to go public is an important one – both for the company and for potential investors. That said, other than in high profile cases how much scrutiny do you think retail investors give an S1 (and how much time is appropriate for them to have to do that)? And I think you’d agree with me that some of the promotion regs (so called “quiet period”) should be relaxed. As long as a company is FD compliant, they should be encouraged, not discouraged from discussing their businesses (IMHO).

      Totally agree on the point you raise about Emerging Growth companies not getting grandfathered in. That makes absolutely no sense and penalizes a group of businesses that played by the rules, did all the hard work to get public and now get none of the benefit of the relaxed regulations.

      • G. Nagesh Rao

        Seth, I agree…

        Spencer’s commentary hit it “spot-on” from . It’s always tough as a former USG’er to openly comment on stuff w/out being a tad cautious with disclosing all the info I know…since there’s info I am privy too that ethically I am bounded not to reveal if it has not been made public, partially because it may not be an official position. With that said…believe me…we talked an awful lot about the various leg-matters in play and the rationale for why they came about and led us to this path.

        I do have some useful papers that our Office of Innovation and Entrepreneurship at DOC produced via our National Advisory Council on Innovation and Entrepreneurship that can help explain the rationale and blue-print for JOBS Act and Startup 2.0. These are publicly available documents…although I am not sure where they are posted on DOC’s website given some recent web-changes at EDA. If there’s a way I can post the published papers here for folks to peruse, happy to provide. I know they are circulating around various circles and then posted in obscure portions of USG’s websites…as a 7 year veteran and also former Patent Examiner…mining for that information is easy :-)

        My last thought to y’all…is the issue of the $1M crowdsourcing bit, and my asking y’all as to why only $1M? There’s a prologue to that inquiry…the folks leading the charge on Startup America and the startup buzz are people who became successful as a result of the “dot com” and “web 2.0″ era. Not to knock on those folks, but creating a “dot com” company given our vast technological resources in the computing space is a helluva lot easier then say building a cleantech, bio-tech, or advance manufacturing based company. Ergo the $1M is tenable for industries that don’t require too much financial capital but might not be as effective for more capital intensive industries.

        Food for thought…

        Seth…great blog…you just made me a convert. :-)

        Best

        -n

        • http://www.sethlevine.com sethlevine

          Thanks for the (again) really thoughtful comment. I’d be happy to post links to the docs you reference below (let me know if you can find them!).
          Regarding the $1M, I understand the idea, but think that it’s hard to have 1) such a low threshold and 2) something that covers such a long period of time. The way I understand it (and this admittedly isn’t an issue I’ve looked into closely) is that the year period is both forward and backward looking, meaning that a company would effectively be barred from raising additional funds in that 1 year period once it hit $1M. I think that’s a mistake (and will lead to some unintended consequences where a business could/should take advantage of a funding opportunity but can’t because of this provision – perhaps ultimately failing as a business because of it).

          • G. Nagesh Rao

            Hi Seth,

            Tried posting links to the docs here… Did not work. I ended up e-mailing the docs I had saved on my laptop to your “contact me” address and etc… Hope you find the reads useful.

            Best
            -n

          • http://www.sethlevine.com sethlevine

            thanks! i didn’t see the email – seth@sethlevine.com?

          • G. Nagesh Rao

            just resent the e-mail to that address…perhaps it got caught by the spambots??

          • http://www.sethlevine.com sethlevine

            got it this time. thanks!

          • G. Nagesh Rao

            Those docs are official and meant for public conveyance. Problem is that they get buried away on the various USG websites and when folks come and go in the system…the docs get moved around, urls lost, and etc… If I knew of a public site for folks to access them, it’d be great…since they are well written and chock full of great info… Best