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May 09, 2018

Industry groups urge reforms to boost IPOs

Prescriptions include regulating proxy advisory firms and changing shareholder proposal rules

A coalition of business groups has issued a wish-list of reforms on issues ranging from research coverage to corporate governance that they argue would smooth the path for more companies to go public in the US.

The 36-page report also proposes changes in areas such as the Jobs Act, financial reporting burdens and equity market structure for small public companies. It is authored by the Securities Industry and Financial Markets Association (Sifma), the US Chamber of Commerce, the American Securities Association, the Biotechnology Innovation Organization, the Equity Dealers of America, TechNet, Nasdaq and the National Venture Capital Association.

The report has been issued at a time where there is widespread concern about the number and development of companies going public in the US.

‘Our capital markets are the envy of the world and a critical source of financing for both domestic and foreign businesses and governments, particularly small and mid-sized businesses, providing 65 percent of total funding for economic activity in the US,’ Sifma president and CEO Kenneth Bentsen says in a statement. ‘Unfortunately, regulatory burdens and antiquated laws are unduly hampering capital formation for these businesses generally and may also be reducing investors’ access to investment opportunities.’

The groups’ aims are likely to find a receptive audience at the SEC, where chair Jay Clayton has expressed similar concerns about a decline in the number of US IPOs. In June 2017 he said the agency was ‘actively exploring ways in which we can improve the attractiveness of listing on our public markets, while maintaining important investor protections.’  

It has already taken action. The Jobs Act, which was implemented under the previous administration to encourage the listing of emerging growth companies (EGCs), allows issuers with less than roughly $1 bn in revenue to submit their draft registration statements confidentially and phase in their reporting obligations over time. In July 2017 the SEC’s division of corporation finance opened this non-public review process to IPO draft registration statements from larger domestic and foreign companies that do not qualify as EGCs.

The groups’ request also comes at a time when the IPO market is relatively robust. US IPO activity in Q1 entailed 36 listings raising a combined $12.8 billion, up 44 percent in terms of volume and 17 percent in terms of proceeds compared with Q1 2017, according to EY. In addition, five of the top 10 global deals took place in the US during that quarter. In total, US exchanges accounted for 41 percent of all global cross-border activity in Q1 2018 compared with 35 percent in the first quarter of last year.

Regarding the Jobs Act, the groups argue that issuers continuing to meet the definition of an EGC should benefit from certain ‘on-ramp’ provisions for 10 years, up from five.

They note that the law includes measures designed to ease certain disclosure and other requirements for EGCs, such as streamlined financial disclosure, allowing for confidential reviews of registration statements by SEC officials, simplified executive compensation disclosure and an exemption from certain executive compensation requirements under the Dodd-Frank Act, such as the requirement for say-on-pay votes.

‘The vast majority of EGCs have taken advantage of all of these provisions, which has helped lead to a post-Jobs Act increase in the public offering market,’ the report’s authors say. ‘We believe that as companies continue to mature five years after going public, extending the exemption from these requirements would be a further incentive for businesses to go public in the first place.’

In terms of research coverage of EGCs and other smaller companies, the groups want to amend Rule 139 under the Securities Act to provide that continuing coverage by research analysts of any issuer – as opposed to only those that qualify for Form S-3/F-3 – would not be deemed to constitute an offer or sale of a security of such issuer before, during or after an offering by such issuer.

‘If an analyst has already been covering an issuer, there is no clear reason why the distinction requiring the issuer to be S-3 eligible provides additional protection to investors,’ the authors write. ‘If an analyst has determined that the issuer has significant trading and float worth covering, the analyst should be permitted to continue [his or her] coverage through an offering by the issuer regardless of S-3 eligibility.’

Other recommendations in this area include allowing investment banking and research analysts to jointly attend ‘pitch’ meetings in order to have open and direct dialogue with EGCs, and the SEC examining why pre-IPO research has not materialized following passage of the Jobs Act. The law liberalized ‘gun-jumping’ rules to permit investment banks to publish pre-IPO research on EGCs, but few have done so, according to the groups.

The groups’ recommendations in the area of corporate governance, disclosure and other regulatory requirements include:

  • Implementing ‘reasonable and effective SEC oversight of proxy advisory firms’
  • Reforming shareholder proposal rules under Rule 14a-8 of the Securities Exchange Act, in particular by raising the ‘resubmission thresholds’ that determine when a proponent is allowed to resubmit a proposal that has previously attracted low levels of support
  • Simplifying quarterly reporting requirements and giving EGCs the option to issue a press release with earnings results in lieu of a 10Q.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...

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