Feb 20, 2018
By Rosanne Felicello, Partner, CKR Law
Signed into law in 2012, the JOBS Act (a misnomer from the beginning!) was intended to prop up the languishing IPO market. It created a class of companies (emerging growth companies) and offered them some relief from the Sarbanes-Oxley Act (SOX), including a 5-year delay to comply with Section 404(b) of SOX unless certain other conditions are met.
From the beginning, many (yes, including me) raised concerns that decreasing the regulations on emerging growth companies just four years after the 2008 financial crisis was only going to lead to more fraud on the public markets, rather than an increase in jobs or improvement of the economy.
At least initially, however, it was an open question as to whether the lighter regulation would lead to an increase in IPO activity. But now the verdict is in.The JOBS Act has not led to more IPOs in the U.S. market. According to statista.com, there were 105 IPOs in the U.S. in 2016, as compared to 125 IPOs in 2011, the year prior to passage of the JOBS Act. And there is little support for the notion that EGCs have created a significant number of jobs. A white paper issued by the Public Company Accounting Oversight Board based on data through November 15, 2016, noted that 62% of EGCs were not listed on public exchanges and, of these, approximately 50% reported zero revenue, including 23% which were disclosed to be shell companies. See https://pcaobus.org/EconomicAndRiskAnalysis/ORA/Documents/White-Paper-Characteristics-Emerging-Growth-Companies-November-2016.pdf
Moreover, there is a significant concern that eliminating the requirement that EGCs comply with Section 404(b) for the first five years has led to increased levels of fraud on the public market. See https://www.bloomberg.com/gadfly/articles/2017-07-13/sec-head-jay-clayton-s-deregulation-push-won-t-reignite-ipos. And the PCAOB white paper states that about 51% of EGCs "received an explanatory paragraph in their most recent auditor's report expressing substantial doubt about the company's ability to continue as a going concern."
Thus, given that the JOBS Act has not accomplished its intended purpose of increasing the number of IPOs and increasing the job market, but instead has led to riskier companies entering the public financial markets, isn't it time that we rethink it?
If we as a society view public financial markets to be in the interest of the greater good, then we should take steps to make it more attractive for companies to enter these markets. But it must be a balance. And the answer may not be less regulation. After all, we need to be sure not to make it easier for those with nefarious intentions to commit fraud.
This article was originally posted on LinkedIn here.