Many of the small biotechs that went public thanks to the Jumpstart Our Business Startups (JOBS) Act "could be left to die on the vine" unless Congress takes additional steps to help emerging growth companies (EGCs) fully access the market, a House subcommittee was told this week.

Twenty-seven biotechs have gone public through the JOBS Act, and many more that are considering an initial public offering (IPO) have filed with the SEC, Kenneth Moch, president and CEO of Chimerix Inc., told the House Subcommittee on Capital Markets.

He credited the JOBS Act with Durham, N.C.-based Chimerix's successful IPO in April that raised $118 million by selling 8 million shares priced in the middle of the proposed range. (See BioWorld Today, April 16, 2013, and BioWorld Insight, July 8, 2013.)

The JOBS success stories are continuing. May was the best month since 2000 for life sciences companies, Moch said, with eight EGCs in the sector going public. He noted that only 10 had IPOs in 2011. And the valuation for life sciences IPOs this year is, on average, about 21 percent higher than last year.

All of that comes when venture capital investment in biopharma is at historic lows, Moch said. He cited a recent survey of venture capitalists that showed 40 percent of them plan to further decrease their investments in biopharma over the next three years.

While the JOBS Act has been a good step for biotech, the impact of the provisions that have been implemented reach far beyond the life sciences industry. Testifying on behalf of the National Venture Capital Association, JumpStart Inc. CEO Raymond Leach said more than 500 companies have registered with the SEC as EGCs. That's 77 percent of all companies that have filed since the JOBS Act was passed last year.

Of those registered as EGCs, 63 percent have used the confidential filing provisions of the act, and more than 200 of them may be currently registered for an IPO. Micro-cap IPOS – those with less than a $250 million market cap – comprised 40 percent of the IPOs undertaken so far this year – a 21 percent increase over last year, Leach said.

"The revival of interest in [the] IPO market on the part of small companies" shows the JOBS Act has been a major success in its first year, Leach said, adding that it is "an exciting first step in the path toward renewing the health and primacy of the U.S. public markets."

Next Step

But IPOS are just the first step. Smaller companies going public need help so they can thrive in a market sized for large-cap firms. Congress and the SEC can provide that help by allowing flexibility in tick size, increasing the public float for reporting requirements and exempting small companies from other reporting regulations that divert limited funds from R&D to compliance, said Moch, testifying on behalf of the Biotechnology Industry Organization (BIO).

Since today's market favors the short-term, high-frequency trading of large-cap stocks by investment banks, small public companies struggle to achieve visibility and liquidity, Leach said. Besides hurting the companies themselves, that favoritism also impacts the overall economy, since 92 percent of job growth in venture-backed companies occurs after they go public, he added.

Rep. Scott Garrett (R-N.J.), chairman of the subcommittee, said there is little doubt that big businesses are doing better today than small companies, which are "mired in government red tape."

Most of that red tape stems from the unintended consequences of well-intentioned regulations. Tick size is a prime example. Hoping to increase trading activity for large issuers with millions of shares traded daily, "the SEC adopted decimalization in 2000, changing the standard spread between bid and ask price (known as tick size) from 1/16 of a dollar (6.25 cents) to 1 cent," Moch said in his testimony. The change worked for the large-cap stock, but it created a stagnant environment for EGCs.

BIO has proposed a pilot program that would allow small issuers to choose larger trading increments, 5 cents or 10 cents, to spur trading.

Another example is the requirement for public companies to provide financial statements in an interactive data format using eXtensible Business Reporting Language (XBRL). The regulation was intended to provide investors with more financial information in a format that makes the data easy to compare.

Because XBRL requires specific expertise beyond traditional financial or accounting training, small issuers generally have to hire external contractors to complete their XBRL filings, increasing the cost of compliance. For example, Moch estimated that XBRL compliance cost Chimerix about $50,000 a year. That's investor money that could have been spent on developing CMX001 , the company's oral nucleotide analogue lipid-conjugate in Phase II trials to fight infections caused by the cytomegalovirus.

Moch urged that EGCs be exempted from the XBRL requirements.

More Regs on the Way

In the future, EGCs may face more burdens, even if they choose to stay private, as the SEC implements other provisions of the JOBS Act. To safeguard investors from fraud that could arise out of lifting the ban on general solicitations under Rule 506 private offerings, as required by the JOBS Act, the commission this week proposed a package of amendments to Regulation D, Form D and Rule 156 of the Securities Act. (See BioWorld Today, July 11, 2013.)

The proposed changes to Reg D would require:

• the filing of a Form D before general solicitations are made in a Rule 506 offering;

• the filing of a closing amendment to Form D after the offering closes;

• submission of written general solicitation materials used in the offerings, including certain legends and other disclosures;

• disqualification from future offerings if the issuer didn't comply, within the past five years, with the Form D filing requirements.

The SEC also is proposing changes to Form D to require additional information about Reg D offerings and extending the antifraud guidance contained in Rule 156 to the sales literature used in private offerings.

In recommending the proposals to offset the potential dangers of allowing general solicitation, the SEC staff recognized that the changes would increase the regulatory burden for small companies, but they claimed the benefits would justify the higher cost of compliance.

As the SEC was voting to propose the amendments Wednesday, the House subcommittee was looking for ways to reduce the regulatory burden for small companies. Speaking at the subcommittee hearing, Rep. Carolyn Maloney (D-N.Y.) acknowledged the need for regulations to monitor the implementation of measures like the JOBS Act to ensure that they're working, but she said small companies shouldn't be spending the majority of the funds they raise on SEC compliance.

Editor's note: This is the second of a two-part series on capital formation. Part I looked at SEC actions in implementing parts of the JOBS Act.