Today the JOBS Act passed the Senate and, since it’s backed by President Obama, is about as close to a lock as laws get. About half the law is focused on venture capital related issues and the other half has implications for private companies that investment bankers are often advising. Lots of exciting and important developments to discuss and predict, but in this article, we focus on how the JOBS Act will change the role of investment bankers and M&A advisors.
There are a few major components to the bill, three of which will have big effects on investment banking in particular.
- The law raises the limit on Reg A Offerings from $5 to $50 million
- It allows for general solicitation in Reg D transactions
- It creates an “Emerging Growth Companies” category of public businesses with regulations different from larger public companies.
Here’s a breakdown of how each of the three will affect bankers in the future.
General Solicitation for Reg D Offerings
Historically Regulation D transactions, typically private placements, have restricted general solicitation. The transactions had to be between parties who already knew each other, significantly limiting the pool of potential investors. The regulation created an insular crowd and created interesting restrictions around tracking how a party had been contacted. With the new law, Reg D transactions can be generally solicited, removing all restrictions and penalties for advertising private stock sales. Bankers can leverage new distribution channels and private market networks to advance their clients’ interests even more quickly. It also significantly reduces the regulatory and potential record-keeping burden that investment bankers have historically had to bear to document their adherence to the SEC’s General Solicitation requirements.
More broadly, the lifting of General Solicitation requirements has a huge impact on private capital markets. It opens up the ability to solicit investment opportunities from any investor who is accredited according to SEC definitions. The law still requires that investors are accredited in order to invest, but it allows investment banks to reach out to investors they don’t have an established relationship with already. What a windfall and a win-win for bankers and entrepreneurs alike! This means more private placements can be completed faster, making Reg D transactions more popular and feasible. As investment bankers start to figure out how to take advantage of this new reality, we can expect to see more deals get done and more deserving companies obtain the right financing to grow, create value, and create jobs.
Regulation A Offering Limits Raised to $50 Million
Many smaller private companies don’t go public because of the massive amount of paperwork and attendant costs associated with being a public company in the modern regulatory environment. Regulation A Offerings, previously limited to companies raising less than $5 million in an IPO, allow smaller companies to file without as much overhead. The JOBS Act extends the exemptions to companies filing for as much as $50 million in a public offering. This is a *big deal*. It allows companies in the middle market to consider going the route of IPOs rather than raising a round of private mezzanine or equity growth capital. Expect bankers to start advising this as an option, especially if the bank has the balance sheet to underwrite the offerings.
“Emerging Growth Companies” Public Classification
This is probably the most hotly debated piece of the entire JOBS Act. The new category allows companies with less than $1 billion in revenue to avoid major regulations that currently affects all public companies. Companies in the category would be exempt from parts of the Dodd-Frank Act, would roll back the requirements of having an outside auditor checking internal financial controls, and would only require companies filing for IPO to produce the trailing two years of audited financial statements compared to the three years currently required. We’ll have to watch how this one really takes shape.
Based on activity we observe on the Axial platform, buyer appetite for a given company can change very quickly from year to year based on changes in their financial history. This is particularly evident in cyclical industries. Very often we see companies that go to market with negative financials in a previously bad year, though they are having a strong current year, not get significant interest. When they return to market the following year, showing only two good years of financials, the interest level significantly increases. The regulatory changes allowing companies to only disclose two years of financials when going public should have a similar effect and will allow companies to go public more quickly after downturns in their business. Bankers will be able to more quickly write deals on recovering companies.
One fear here is many more cyclical companies are going to come to market during the upswing in their financials without potentially having to disclose some of the cyclicality that still is present in their business. Either way, it should be more business for bankers writing public IPOs.
What else will the JOBS Act bring? Please share your thoughts in the comments below or link to other good pieces on the subject. All in all, we’re pretty darn excited about it.