Why is the JOBS Act important to Tech M&A?
A few comments on the recently passed JOBS Act. This is a very powerful piece of legislation almost unanimously passed by Congress and BOTH sides of the aisle and signed by the President last week. How it came about is an interesting story. About a year ago, some executives were asked to join a discussion at Treasury to examine the cause of the slowdown in IPOs and look for solutions to “jumpstart” this negative trend. Silicon Valley VC Kate Mitchell attended the meeting and suggested that she and some other executives spend six months or so reviewing the problem and come up with ideas to reverse this trend. Now what’s amazing about this is that Mitchell’s group recommended a number of initiatives which were written into draft legislation and went on to be approved by bi-partisan majorities in both houses and signed into law in LESS than one year.
Here a few of the problems that they were trying to solve. Many small private companies had difficulty raising money unless it was from single large institutional investors, like a VC, due to existing securities laws. And there were more restrictions as to the number of shareholders a private company could have before it had to register under federal securities laws. Further, small emerging public companies were held to the same reporting requirements as billion dollar public enterprises, and foreign companies attempting to register their shares on US exchanges had better confidentiality privileges than their US counterparts. All of this added up to creating an environment that was limiting the whole start-up, growth and IPO eco-system. The bottom line is that more than 90% of job creation for companies happens post-IPO.
The law is broken down into three sections.
Title I allows for newly public companies with less than a billion in revenue get a jumpstart with fewer regulations for up to five years. During this period, they will have a much lower burden of accounting, disclosure and other paperwork, plus certain other advantages, saving millions of dollars and management focus. This will clearly create more public companies with revenues in the mid-$100Ms and will make them potential acquirers with earlier access to capital. So I expect an increased pace of M&A, and higher bids for smaller entities – not just in the US, but internationally, with US firms as buyers.
Title II provides further deregulation in easing communications with potential investors. More information about an offering can legally be published on a company site, or in a research report. Angel financings can be publicized without worrying about exposing non-accredited investors to them, and some companies can raise 10 times as much as before, while the total number of investors a private company can have is raised, too. I expect that you will see more angel investors come into the market which will help more new companies get launched.
Title III allows for something called Crowdfunding. What’s important is that, finally, after 80 years, the American public is going to have an opportunity to invest in small companies. The SEC will need to write the implementation rules, but the statute clearly intends a broad audience – really everyone, with certain limits on amounts that an individual can invest, based on income levels. Crowdsourcing will be managed by accredited funding portals on the web. It won’t be as easy as buying lottery tickets, however, I think it will transform capital formation for many early stage companies.
For more detailed analysis on the JOBS Act, please visit the Corum Group website for an upcoming white paper with more details.
Posted by JonScott, Vice President on 16 April 2012