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Small Company IPOs and Equity Crowdfunding: The Impact of the Jobs Act

Date: September 07, 2017 Posted by: seedsprint

Without funding, even the best ideas can’t scale up.

Back in 2012, the Jumpstart Our Business Startups (JOBS) Act was passed to facilitate funding innovation in the United States. On the JOBS Act’s 5th anniversary, we wanted to explore two of its major areas of focus: small company IPOs and crowdfunding.

Going Public in the United States

One part of the JOBS Act was intended to facilitate IPOs, but five years later it seems that measuring its impact on IPOs is far from straightforward.

On the whole, IPOs in the United States trended downward in the years after the JOBs Act was passed, with the average number of IPOs per year in the United States hitting a 7-year low in 2016. Experts typically do not cite the JOBs Act when discussing the factors of the IPO drought, which include an active mergers and acquisitions market, events like Brexit and the US election, and a public skeptical of sky-high tech valuations. A surge in IPO activity in Q1 2017 has this year pulling ahead of 2016, a revival that experts at EY credit to the post-election market rally.

According to Joseph Hall, a former Managing Executive at the U.S. Securities and Exchanges Commission, the JOBS Act has made the steps to becoming a public company simpler, but expressed doubt that it had any major impacts on overall IPO levels.

“I think if a company was ready to go public, they were [already] a good candidate… the JOBS Act came along [and] made that a little bit easier,” Hall stated in an interview with the Financial Executives Research Foundation in early 2017.

That answer seems unsatisfying – shouldn’t the JOBs Act have had some kind of effect?

The JOBs Act and Small Company IPOs

The answer is that it has – but the impact is mainly related to Title IV, the provision that helps small companies file for an IPO more easily. The impact is focused on small company IPOs versus traditional IPOs, rather than on overarching IPO trends.

The JOBs Act provided a mechanism, Regulation A+, allowing small companies to pursue “mini-IPOs” – raising up to $50 million from the general public. In August 2017, the division of economic and risk analysis at the Securities and Exchange Commission published a report that indicated the Regulation A offerings jumped significantly in the 18 months after the new rules went into force.

The number A+ offerings relative to traditional IPOs has grown.

No company needs to IPO just for the sake of it. With industry collaboration platforms like seedsprint, emerging technologies may find themselves find themselves partnering with existing companies that help them scale. But the more possibilities that are out there to support tech companies, the better.

And small company IPOs aren't the area where the JOBs Act has had an impact.

A New Funding Strategy for Startups: Equity Crowdfunding

The more pronounced impact of the JOBS Act seems to be on equity crowdfunding, a much-hyped approach to financing new technology in its earliest stages. 

Though the Jobs Act was signed in 2012, its crowdfunding provisions (Title III: Regulation Crowdfunding) did not take effect until May 16, 2016. This part of JOBS Act allows ordinary Americans making less than $200,000 a year ($300,000 for married couples) – the ability to invest directly in the equity of a startup. The Act also authorized the use of third party portals for this kind of crowdfunding.

Even before the JOBS Act made it possible for this type of investor to take equity, “family and friends investors” had purchased billions of equity in US technology companies. Equity investing may now tempt even more first-time or small-scale investors.

Crowdfunding Versus Venture Capital

What will happen to traditional venture capital as crowdfunding expands?

Eileen Burbidge, from VC Firm Passion Capital, says that she is glad the ecosystem is getting larger – but that traditional VCs won’t suffer as a result. When Reuters asked Burbidge if she saw equity crowdfunding pulling business away from VC firms, she responded, “I don’t think so… the whole pie is growing bigger. We’re seeing more people start businesses, more innovation, more opportunities.”

There is disagreement on this count; reporters at both Forbes and TechCrunch have published articles predicting that VC firm could become destabilized by the rise of crowdfunding, as their funders pivot to direct investment via new crowdfunding platforms.

According to some, growth in crowdfunding is related to the decentralization of startups, beyond traditional hubs like Silicon Valley – where VC firms thrive.

“[Startup] proliferation has been global whilst the innovative companies and venture investors remained local,” writes TechCrunch. This implies that equity crowdfunding may come to serve innovators who have trouble securing venture capital in today’s tech ecosystem.

The Fate of Equity Investing

No matter its impact on VC as a whole, democratization of startup funding is likely to make a big difference for certain startups.

New technology drives the seedsprint community, and so changes to new funding approaches like crowdfunding are always of interest.

There may be cases where equity investing and crowdfunding can give a small company enough runway to tweak their technology, develop a proof of concept, or gather data – successes that they can then present to a major investor or corporate partner.

Both small company IPOs and equity crowdfunding unlock new possibilities for fundraising. Data shows us that the JOBS Act is having an impact on emerging technology companies.

 

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