Written by wordpress627 on August 16, 2018
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PART TWO: The SEC’s concerns
Although the number of IPOs is slowly rising, the Securities and Exchange Commission remains concerned about public market access for smaller companies, and have adopted and proposed a number of steps to address the regulatory components of the process, including:
- Expanding confidential submissions to all companies. This is important because companies can wait for the right market conditions, and if the IPO is postponed, they can avoid speculation that it was due to SEC comments.
- Regulation A+ of Title IV of the JOBS Act came into effect in 2015, allowing companies to raise up to $50 million in a mini-IPO, and then proceed to a regular IPO. More than 180 companies raised about $650 million in proceeds using this provision and 10 companies were listed on NYSE and NASDAQ.
- The SEC is considering whether to roll back some other provisions and provide additional reliefs, including permitting “testing the water” for all companies, not only emerging growth companies (EGC). This allows companies to evaluate interest before filing for an IPO.
- In the most recent attempt to curb regulatory costs, in June 2018 the SEC adopted a proposal that expanded the definition of smaller reporting company. Smaller reporting companies may provide scaled down disclosures on certain topics.
On the face of it, the 60 companies that went public in the first quarter of 2018 looks like a good sign that the IPO market is thawing. The percentage of EGC companies, as a percentage of total IPOs, rose sharply in 2017 and the first quarter of 2018 versus previous years –almost 90% from 70% – indicating that smaller companies are going public more frequently.
There are several factors that will prohibit a return to the number of IPOs we saw at the beginning of this century. In 2000 there were 126 IPOs in the first quarter and 397 total that year. Many of the companies that went public in the 1990s did not have viable long-term businesses and closed following the dot-com crash in the early 2000s. This analysis will explore factors that may indicate recent efforts made by the SEC to increase capital formation are having a positive effect on IPOs.
SEC Chairman, Jay Clayton, has said in a number of speeches that capital formation is a top priority for the agency, stating “I have been vocal about my desire to enhance the ability of every American to participate in investment opportunities, including through the public markets. I also want American businesses to be able to raise the money they need to grow and create jobs.”
One recent change made to help make IPOs more attractive is allowing all companies to submit confidential, nonpublic draft registration statements relating to IPOs for SEC staff review. Previously, this accommodation was limited to emerging growth companies. Also, the Division of Corporation Finance will accept draft registration statements for nonpublic review during a company’s first year in the SEC’s reporting system. According to the SEC Chairman, many companies have already taken advantage of these changes.
Another goal of the SEC is to reduce filing costs. Mr. Clayton has said “I want to encourage companies to consider whether such modifications may be helpful in connection with their capital-raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.”