companies and their investors. Ultimately, the holding period requirements under Rules 144 and 145 were shortened, making restricted securities more liquid, and smaller public companies gained limited access to the use of shelf registration statements. Although all of these reforms modernised the securities
offering process, streamlined communications requirements, and addressed certain of the concerns related to private or exempt offerings, the reforms did not squarely address the IPO process, nor did they address many of the thorniest issues arising in exempt offerings.
Proposed changes post-Dodd-Frank In the aftermath of the financial crisis, and following adoption of the Dodd-Frank Act, there was renewed focus on the effect of regulation on the competitiveness of the US capital markets and on entrepreneurship and emerging companies. As attention in the United States turned to promoting economic activity, the dialogue related to regulatory burdens and their effect on capital formation took on a new sense of urgency.
Issa-Schapiro correspondence On March 22 2011, House Committee on Oversight and Government Reform chairman Issa sent a letter to SEC chairman Schapiro. The letter raised concerns about whether the current securities regulatory framework had a negative impact on capital formation, leading to the dearth of IPOs in the US, as well as the extent to which SEC regulations potentially limited other capital raising activities by small and emerging companies.12
The letter
from Issa also sought specific information regarding economic studies conducted by the SEC staff in these areas, along with information concerning the consideration of costs and benefits in connection with SEC rulemakings. Issa’s letter discussed these statistics and raised questions about five topics: the decline of the US IPO market, the communications rules in connection with securities offerings, the 499-shareholder cap under section 12(g) of the Exchange Act, organisational considerations, and new capital-raising strategies. In her response dated April 6 2011, Schapiro stated she
had requested that the SEC staff take a fresh look at the agency’s rules in order to develop ideas for the SEC about ways to reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection.13
Schapiro outlined a number of new SEC
initiatives in her response, including SEC staff review of (i) the restrictions on communications in initial public offerings; (ii) whether the general solicitation ban should be revisited; (iii) the number of shareholders that trigger
public reporting, including questions regarding the use of special purpose vehicles; and (iv) the regulatory questions posed by new capital-raising strategies, such as crowdfunding. Schapiro also indicated that the SEC was in the process of forming a new Advisory Committee on Small and Emerging Companies, which was subsequently convened.
Decline of the IPO market in the US Issa’s letter cited statistics about the declining US IPO market and asked whether the SEC had evaluated the reasons for such a decline. The letter asked whether the possible reasons for the decline included increasingly complex SEC regulations; costs associated with compliance with the Sarbanes-Oxley Act; the uncertainty generated by the pending rulemakings under the Dodd- Frank Wall Street Reform and Consumer Protection Act (generally known simply as the Dodd-Frank Act); the risk of class-action lawsuits; or the expansion of regulatory, legal, and compliance burdens. The letter also cited examples of the IPOs of Google and
GoDaddy.com that were delayed and cancelled, respectively, as evidence of overly burdensome communications rules. In her response, Schapiro discussed various reasons for the decline in the IPO market, such as each company’s own situation and market factors at the time of the contemplated IPO. Schapiro stated that it is difficult to determine why a company decides to undertake an IPO or declines to do so. The costs associated with conducting an IPO and becoming a public reporting company factor into the decision as to whether to conduct an IPO. Schapiro stated that the SEC had lowered these costs in recent years and that, in 2010, approximately 40% of first-time registrants were smaller reporting companies. Similarly, in 2010, nearly half of registered offerings conducted by first-time registrants were for offerings of less than $10 million. In a discussion about the challenges faced by early-stage growth companies, Schapiro pointed out that such companies have greater difficulty raising capital because of the lack of disclosure on a regular basis, smaller and more variable cash flows, a smaller asset base, and a larger percentage of intangible assets. Schapiro also stated that while there are studies that show that the number of US IPOs had declined,14
other
studies conducted by SEC staff members indicate that for the period 1995–2007, the US market’s share of global IPOs in terms of total dollar proceeds and average dollar proceeds was much higher than those of the United Kingdom and Hong Kong.15
The other reason for
companies to favour an IPO in the European markets is that the underwriters’ spread is significantly lower than in
JOBS Act Quick Start 9
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