Almost two years ago, I wrote a Wall Street Journal op-ed entitled, “Making It Legal to Tweet for Investors.” In the op-ed, I described bipartisan bills that contained modest but significant deregulation of securities laws—an update for the age of social networking.
These bills were eventually merged into the Jumpstart Our Business Startups (JOBS) Act, which was signed by President Obama in April 2012. And in a twist, Twitter is using JOBS Act provisions for its own intial public offering, as revealed by the filing of its first IPO documents last night.
And investors are better off for it, as companies like Twitter going public at earlier stages of growth will mean greater opportunity for ordinary shareholders to grow wealthy with the company. And going public at an earlier stage actually lessens the chance that an IPO will face a Facebook-type fiasco.
As I wrote just after Facebook’s implosion last year, “the size of Facebook’s IPO—over $100 billion in market capitalization—may have made it just ‘too big to succeed’ in generating a return for ordinary investors.” Although Facebook stock is now finally a few dollars above its IPO price and may climb further, this won’t change the problem that ordinary investors missed out on the spectacular growth in the company before it went public.
But a decade ago, even a $1 billion IPO—which LinkedIn, Groupon, and others have all exceeded in the past few years—was unheard of. In fact, Home Depot only had four stores when it went public in 1981. As the retail chain grew with the seed money from its small offering, so did the portfolio of its initial investors.
What changed was the sheer amount of regulation that burdens smaller public companies. Home Depot cofounder Bernie Marcus has said many times that his company never could have gone public when it was that small if provisions of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 had been in effect back then. The Securities and Exchange Commission has calculated that the average annual cost of one Sarbox provision alone—the mandates requiring extensive audits of a company’s “internal controls”—comes to $2.3 million per public company and hits smaller public firms the hardest.
But the good news is that now the JOBS Act, companies launching an IPO are exempt from the internal control mandates and some other onerous provisions of Sarbox and Dodd-Frank until their fifth anniversary of going public, or until they reach $1 billion in annual revenues or $700 million in market valuation, whichever comes first. In the 18 months since the JOBS Act went into effect, there has been a notable increase in small and midsize companies going public and designating themselves as “emerging growth companies” to take advantage of the exemptions under the law.
The online travel site Kayak and the discount retailer Five Below utilized the JOBS Act’s five-year exemption in their IPOs that were widely regarded as successes. And we now know that Twitter will be utilizing this JOBS Act provision, also called the “on-ramp,” as well.
In the “Form S-1” Twitter filed to launch its IPO, the company declares, “We are an emerging growth company, and … we may choose to take advantage of exemptions from various reporting requirements under the JOBS Act.” Implying that it will seek relief from the Sarbox internal control mandates, Twitter states, ”Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we
are no longer an ‘emerging growth company,.”
Because Twitter is such an established presence, it may surprise some that it’s still a midsize company covered by the JOBS Act. But this is potentially good news for investors, as it shows Twitter still has room to grow and ordinary investors can get in on this growth.
Critics of the JOBS Act will say that this modest regulatory relief for Twitter and other firms will lead to increased risk for investors. And indeed, there will be risks with Twitter as there is with every other public company.
Yet a year-and-a-half after the JOBS Act’s “on-ramp” went into effect, there have been virtually no scandals involving “emerging growth companies.” On the other hand, we are observing this fall the fifth anniversary of companies fully subject to Sarbanes-Oxley, such as Lehman Brothers and American International Group, imploding and taking the economy down with them.
For the JOBS Act to reach its true potential, it will of course have to be fully implemented. The SEC has inexcusably delayed implementing provisions such as the liberalization of equity crowdfunding, which would cut red tape to allow very small firms to raise small amounts of money from ordinary investors over the Internet. And we also need to get rid of burdensome and counterproductive rules from Sarbox and Dodd-Frank for all firms, so that job growth and investor return aren’t needlessly hampered.
But the JOBS Act’s bringing about the return of small and midsize IPOs is definitely something to tweet about!