The JOBS Act of 2012 was supposed to help make it easier for early-stage companies to go public. Years later, Kathleen Hanley questions whether the Act may have unintended consequences for capital formation.
When President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law in 2012, many in politics and business believed it would help American startups soar.
The bill contained provisions intended to make it easier for small and growing companies to go public, help them raise capital and ease their transition from young firms to budding business powerhouses. As written, the law provided young companies with important reporting exemptions with the SEC, gave them a pass on some of the more restrictive obligations of the Sarbanes-Oxley Act and more.
At a time of increasingly bitter partisanship in Washington, the JOBS Act was a true rarity—a bill supported by both Republicans and Democrats. When it became law, Obama called the bill a "game-changer" for the American economy, while Eric Cantor, then House Majority Leader, said it would allow business owners to "take risks, grow and create jobs."
With such broad-based support, the JOBS Act seemed all but certain to succeed. But nearly three years after the bill's passage, Kathleen Hanley, the Bolton-Perella Endowed Chair in Finance, began to wonder about its actual impact—and set out to determine whether it had succeeded as its backers claimed it would.
Hanley teamed with colleagues at the University of Virginia and Tulane University to perform an in-depth study of 312 initial public offerings (IPOs) for so-called Early-Growth Companies (EGCs) issued between April 2012 and April 2015. They sought to determine whether Title 1 of the Act was effective in reducing the measurable costs of going public.
Although the JOBS Act promised to help reduce the initial and ongoing costs of being a public company, Hanley and her colleagues found "no evidence" that the bill reduced the direct costs of an IPO issue—typically, expenses tied to accounting, legal or underwriting fees. Additionally, the team discovered an unintended consequence for companies that choose to pursue an IPO under the protections of an EGC; specifically, the IPOs they studied seemed to suffer "significantly" higher rates of underpricing, a trend they believe is tied directly to the legislation's more lax rules for transparency. "Overall, our results are consistent with a large body of literature that shows that investors value transparency and, in its absence, issuers are penalized by lower prices for their securities," the team wrote.
Even so, the team says there is still hope for the bill. Despite the financial difficulties the EGC status conveys, the team was surprised to see that most companies eligible for those protections continue to adopt them—a sign that these companies do believe there is benefit in the process, even if it does not show up in the measurable costs of issuance. For example, firms can now "test the waters" to communicate with investors before conducting an offering and thereby reduce the probability that an offer will be withdrawn. The ability for smaller companies to tailor their disclosure to meet their specific needs is another potentially valuable benefit of the Act that is difficult to quantify. The authors predict that, as time passes, investors are likely to become more familiar with the new regulations, and thus, issuing companies in the future may not face the same consequences as these early adopters.
Kathleen Weiss Hanley is the Bolton-Perella Endowed Chair in Finance and director of the Center for Financial Services. From 2011 to 2013, she was the deputy chief economist of the Securities and Exchange Commission and the deputy director in the Division of Economic and Risk Analysis. Hanley received her Ph.D. from the University of Florida.
Story by Tim Hyland