JOBS Act to benefit IPO market, but beware of scandals: BDO Survey


 Submitted by BDO USA

Chicago, IL “  Capital markets executives at leading investment banks have conflicting views of the recently enacted JOBS Act, according to new study by BDO USA LLP, one of the nation leading accounting and consulting organizations.  A narrow majority (55 percent) of investment bankers believe the JOBS Act will be successful in increasing the number of businesses going public on U.S. exchanges.  However, that growth will come with one major drawback as an identical majority (55 percent) of capital markets executives believe the new law rollback of regulatory requirements for these newly public companies increases the chances of scandals at these businesses.

Solid majorities of the capital markets community suggest  there will be a “positive impact” on the U.S. IPO market when considering the JOBS Act’s provisions that repeal the ban on investment banks from publishing analyst research on IPOs they are marketing (80 percent), provide a five-year exemption from Sarbanes-Oxley mandated audits of internal controls (74 percnet) and increase shareholder thresholds for private businesses (66 percent).    Majorities also say  positive impacts are likely from  the new law provisions to allow crowdfunding (58 percent) and confidential SEC filings (52 percent).

Proportions of the capital markets community that believe various elements of the new JOBS Act will have positive, negative or no impact on the U.S. IPO Market are as follows:


Positive                 Negative               No Impact


Allowing I-bank analysts to                                                      80%                                   18%                                     2%

publish research on IPOs


Five-year SOX exemption                                                           74%                                 23%                                     3%

(On audits of internal controls)


Increased shareholder threshold                                    66%                                 30%                                     4%

for private companies

(From 500 to 2000)


Crowdfunding                                                                                                   58%                                 32%                                 10%

(Can raise up to $1 million

via Internet)


Confidential SEC filings                                                                  52%                                 40%                                     8%

(Can test waters up to 21

days prior to road show)


The JOBS Act was the subject of much debate before it was signed into law and, based on our survey, the investment banking community seems to agree with both the law proponents and detractors, said Brian Eccleston, a partner in the Capital Markets Practice of BDO USA. Capital markets executives believe many of the new law provisions will have the desired impact of increasing IPO activity, but they also acknowledge that some of the very same provisions open the door to potential scandals. Bankers are particularly divided on how the Act relaxed disclosure requirements may impact IPO pricings and whether the confidential SEC filings will have the desired effect of increasing offerings.

A provision of the JOBS Act allows emerging growth companies to provide less information and requires fewer financial disclosures in their IPO documents and subsequent filings.   Although this may make it easier to go public, investment bankers were relatively split on how this provision will impact IPO pricings.   Although a slight majority (52 percent) are not concerned about the impact of the JOBS Act on IPO pricings, this is considered a legitimate concern by the balance of the bankers.   Almost half (48 percent)  say this lack of information will ultimately have a negative impact on IPO pricings.

These findings are from “The 2012 BDO IPO Halftime Report,” a national telephone survey that examines the opinions of 100 capital markets executives at leading investment banks. The survey is conducted by Market Measurement Inc., an independent market research consulting firm, on behalf of BDO USA.   Executive interviewers spoke directly to capital markets executives within a scientifically developed, pure random sample of the nation’s leading investment banks.   The survey was conducted in June 2012.

Below are the detailed findings related to the JOBS Act from the survey:

·                 Widespread Support for Allowing Analyst Research by I-Banks Marketing an IPO. An overwhelming majority (80 percent) believe allowing investment-bank analysts to publish research on offerings being marketed by their investment banking colleagues is a positive for the IPO market. Just under one-fifth (18 percent) of the bankers think it will have a negative impact.  This practice was previously banned due to concerns that it opened the door to market manipulation.

·                 SOX Exemption to Bolster IPO Activity.  Almost three-quarters (74 percent) of the investment bankers feel the five-year SOX exemption, which says that emerging growth companies are no longer required to have an external audit of internal controls over financial reporting as required under Sarbanes-Oxley Act (SOX) of 2002,  will have a positive impact on the growth of U.S. IPO activity.  Just under a quarter (23 percent) think the SOX exemption will have a negative impact, and three percent do not see it impacting U.S. IPO activity at all.

·                 Increased Shareholder Thresholds for Private Businesses. The JOBS Act increased the maximum number of shareholders a private company can have before it is required to register with the SEC.  The threshold was increased from 500 to 2000. Two-thirds (66 percent) of capital markets executives believe this element of the law will have a positive impact on the IPO market, compared to just under one-third who predict a negative impact.   Four percent of the bankers feel it will have no impact.

·                 Crowdfunding.   A majority (58 percent) think allowing startup businesses to crowdfund, raising up to $1 million annually from small investors via the Internet while remaining exempt from the standard SEC registration process,  will have a positive impact on the U.S. IPO market.  Approximately one-third (32 percent) believe crowdfunding will have a negative impact and a small minority (10 percent) say it will have no impact at all.

·                 Confidential SEC Filings.  The investment banking community was split when it came to the impact of a new rule that allows prospective offering companies to confidentially register an IPO with the SEC before deciding to move ahead with the offering.   Just over half (52 percent) of the bankers think this will positively impact the U.S. IPO market, but a strong minority (40 percent) think it will have the opposite effect.   Fewer  (8 percent) say it won’t have  any impact.

·                 Shot in the Arm for U.S. Exchanges.  Reflecting a potentially significant impact from the JOBS Act upon U.S. IPO activity, more than one-half (55 percent) of all investment bankers believe this law will increase the number of businesses going public on U.S.  exchanges, compared with  45 percent who do not feel it will have that desired effect.

·                 Potential for Problems.   The capital markets community agrees with critics of the JOBS Act that believe the new law rollback of regulatory requirements for newly public companies opens the door to potential market manipulation and fraud.  A majority (55 percent) feel these rollbacks increase the chances for scandals at these businesses.


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