How will the JOBS Act affect IR?

A lot of the things IROs know about companies going public have changed, cautions securities lawyer

The Jumpstart Our Business Startups (JOBS) Act, signed into law last week, is intended to lighten securities regulatory requirements in disclosure and registration on so-called emerging growth companies. Now that the SEC is asking for public comments, it’s time for IROs to also take a step back and pay attention.

‘A lot of the things IROs have learned about companies going public and what they need to do or can’t do during the IPO process has changed,’ says Michael Littenberg, partner and head of the public companies group at New York City-based Schulte Roth & Zabel.

‘Emerging growth companies aren’t required to have a compensation discussion and analysis section. They’re required only to have two years of audited financials. They’re not subject to say on pay. There will be some changes to the [IRO] job description.’

The new law will affect many companies, and not always in a neat and tidy way. For example, the term ‘emerging growth company’ can be deceptive. It technically means a company whose annual gross revenue was under $1 bn in its most recently completed fiscal year.

‘An emerging growth company can be a fairly decent sized company out of the box,’ Littenberg says.

How companies can lose 'special' status

Although the special regulatory status lasts up to five years, a number of factors can kick a company out of the category earlier than that – for example, if it has more than $1 bn in annual revenue in a year or issues more than $1 bn in non-convertible debt during a three-year period.

‘If you get large fairly quickly, you can cease to be an emerging growth company early on,’ Littenberg says. That means the five-year period for favorable regulatory treatment can end prematurely.

IROs also should be aware that many types of communications once prohibited in the IPO process are now allowed for emerging growth companies.

‘All of these restrictions we’ve had on private placements – like general solicitation and advertising – are being changed,’ says Littenberg. ‘You can now talk to anybody you want. Private placements can still only be made with accredited investors, however.’

Analyst restrictions raised

Another change has been the lifting of restrictions on analysts. ‘There will be less restriction around communications by analysts as well as participations by analysts in the offering process,’ Littenberg says, so analysts won’t be absolutely prohibited, as under Sarbanes-Oxley, from attending any meetings.

‘There has been a lot of criticism of loosening restrictions on analysts, but the JOBS Act isn’t removing all the restrictions.’ The main point is that analysts will have fewer restrictions on publishing research, giving emerging growth companies more opportunity to get coverage, he explains.

For all the relaxing of rules, Littenberg cautions that IROs must still be careful. ‘When communications practices are less restrictive, it creates a set of challenges when people put out more information,’ he explains. ‘There is still liability under securities legislation. IROs have to be sensitive, understand the new rules and think through the implications.’

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  1. Phil Conkling|

    The effect of the JOBS Act on corporate reputations in general, and the practice of investor relations in particular, will be extremely negative.

    Sarbanes-Oxley and Dodd-Frank reforms that have made it difficult and expensive to compete for capital in public markets has helped weed out companies that were unprepared for, or unwilling to comply with, public-market scrutiny and demands as a consequence of offloading risk onto public investors.

    IPO rules should be preserved and more rigidly enforced, not reduced and made easier to dodge. Making it easier to abuse investors' trust will tarnish all corporate reputations, including companies that honor that trust.

    And let's be honest - the only jobs that the JOBS Act is intended to protect are those of Wall Street i-bankers starved for IPO-fueled bonuses, and those of Eric Cantor and other leaders in Congress dependent on their financial favors. It passed in a wave of bipartisanship only because addiction to campaign cash is a truly bipartisan disease.

    The JOBS Act will not accelerate real job creation, because capital markets have responded to Sarbanes-Oxley and Dodd-Frank strictures by creating more private-market financing options for real, investment-worthy private companies.
    The JOBS Act is law. Let's encourage the SEC to plug the many holes it creates with tough regulations and strict enforcement.

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