For many companies, going public is an expensive, daunting and time-consuming process that comes with an often-overwhelming host of regulatory requirements.
Last week, members of the capital markets subcommittee of the House Financial Services Committee acknowledged that the heft of regulations has incentivized companies to remain private for as long as possible, leading to a decline in the number of publicly traded firms. The topic was surfaced during last week’s hearing, entitled “A Roadmap for Growth: Reforms to Encourage Capital Formation and Investment Opportunities for All Americans.”
According to subcommittee chair and Missouri representative Ann Wagner, a Republican, last year the US IPO market reached one of its lowest points on record. And, if the SEC continues to finalize “burdensome rules” it has proposed, and should ongoing compliance costs for publicly traded companies continue to rise, companies will continue to stay private, Wagner said.
Joel Trotter, co-chairman of Latham & Watkins’ national office, noted that aside from the barriers to going public, companies face further higher compliance burdens after IPO. He suggested a balanced approach to scale regulatory requirements to the size of the company.
“This approach encourages IPO activity while maintaining the existing, and continuously increasing, level of securities regulation for mature public companies.”
‘Rife with scams’
However, Melanie Senter Lubin, Maryland Securities Commissioner and president of North American Securities Administrators Association, cautioned reducing regulations on companies looking to go public as the private markets are “rife with scams and frauds because of their lack of transparency.”
Frauds like the FTX collapse, Lubin said, cause people to “question the wisdom of participating in our markets.”
“As we hear these lessons learned, we need to refine the securities regulatory framework so that it better balances the needs of entrepreneurs and retail investors,” Lubin added.
But subcommittee chair Wagner said it is important to have a “streamlined” and “not overly burdensome” regulatory framework to ensure that the capital market is “working efficiently and effectively to provide companies access to the capital that they need to innovate to grow and to create jobs.”
One way to reduce the compliance burden on newly-public companies would be to double the time a public company could retain its emerging growth company (EGC) status under Section 1 of the JOBS Act.
The recently introduced Helping Startups Continue to Grow Act of 2022 would give EGCs a five-year extension of certain exemptions and reduced disclosure requirements. Currently, companies can maintain their status as an EGC for up to five years after they become a public company. However, many of them do not generate enough revenue in that time to support the compliance costs resulting from a loss of EGC status.
The JOBS Act created the EGC designation as a way to ease small companies into the public markets and temporarily shield them from the full accounting and disclosure regime that accompanies SEC registration.
If a company hits $1.235 billion in annual revenue or reaches the five-year anniversary of its IPO, it would lose its EGC status. The proposed bill would amend the Securities Exchange Act of 1934 and Securities Act of 1933 to extend that five-year limit to 10 years.
Latham & Watkins’ Trotter said the EGC status rule should “absolutely” be amended to reduce the “immense liability and compliance obligations,” and amending EGC status would help growing companies and, as a result, create more jobs.
Aiming to help small companies raise the money they need to go public or to continue growing, Republican congresswoman Erin Houchin from Indiana introduced the Regulation A+ Improvement Act, which would raise the cap for Regulation A, allowing more small- to mid-sized companies to sell securities on public markets.
The Regulation A+ Improvement Act increases the dollar amount that companies can raise under Regulation A to $150 million, up from the current $50 million cap, without having to go through the standard IPO process, commonly referred to as a mini-IPO.