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IPO Line Starting to Form Behind the JOBS Act

By Mari Serebrov
Washington Editor

It will be a while before all the provisions of the Jumpstart Our Business Startups (JOBS) Act kick in, but a number of emerging growth biotechs are already queuing for an initial public offering (IPO).

With only a few pieces of the law in effect yet, Mark Heesen, president of the National Venture Capital Association, said the line is starting to form with several biotechs registering to go public. The result is an IPO pipeline that started to flow late last month, he added. (See BioWorld Insight, July 9, 2012.)

William Hicks, a partner with Mintz Levin, agreed, saying he expects "a nice flow of IPOs after the summer, if the market permits," as a number of companies are making confidential IPO filings. He credits the flow to a few provisions that were implemented as soon as the JOBS Act was signed into law in April, allowing emerging growth companies to confidentially file a draft registration before an IPO date and reducing the disclosure requirements for filing an S-1 . (See BioWorld Insight, June 4, 2012.)

"I think it is fair to say that the ability to make confidential initial filings is a factor encouraging some companies to move forward in an uncertain IPO market," Hicks told BioWorld Insight. Another factor is that more companies are considering going public by Form 10. Although not directly driven by the JOBS Act, that move shows a convergence of the act "with trends that were already under way to find efficient, de-risked ways to get good entrepreneurial companies public," he added.

Private offerings also are expected to benefit when the SEC implements a JOBS Act provision that permits emerging growth companies to be more open about their plans for private offerings conducted under Rule 506 of Regulation D and Rule 144A of the Securities Act. By allowing general solicitation and advertising, the measure will help biotechs find the capital they need to get off the ground.

When those changes will be implemented is anyone's guess. The SEC missed its July 4 deadline for issuing proposed rules for the Regulation D rewrite. The holdup has been trying to identify, as per the JOBS Act, what "reasonable steps" an issuer must take to verify that investors are accredited, SEC chairwoman Mary Schapiro said at a recent House Oversight subcommittee hearing. (See BioWorld Today, July 6, 2012.)

The current practice is self-certification on the part of the investor. Schapiro's testimony suggested something more may be required in the future.

The SEC has made progress on staff recommendations and an economic analysis of the mandated changes to Regulation D, Schapiro said, but the commissioners won't consider those recommendations until an Aug. 22 meeting. Once the proposed rule is released, the SEC will have to allow for public comment and then incorporate the comments into a final rule – a process that could take several months.

Meanwhile, the commission is working to hit its Dec. 31 deadline for proposing crowdfunding rules. Hitting that deadline may be tough, Schapiro warned the subcommittee, because of all the rules involved.

The original idea behind crowdfunding "was to harness the power of the Internet as a nearly costless means of communication to pool modest sums from a large enough number of supporters that the resulting fund would be sufficient" to meet the issuer's objective, Brian Cartwright, senior adviser at Patomak Global Partners LLC and former general counsel at the SEC, said in his testimony to the subcommittee.

That simplicity was lost when lawmakers wrapped the crowdfunding provision in a lot of restrictions and requirements in an attempt to protect not-so-savvy investors. As a result, crowdfunding "morphed into a conventional securities offering, with lawyers, accountants and financial intermediaries – plus ongoing reporting requirements," Cartwright said. (See BioWorld Today, March 29, 2012.)

Depending on how the SEC implements the crowdfunding requirements, the cost of such an offering could eat up a significant percentage of the proceeds, raising the question of whether it's the best option for many companies, Cartwright said.

As it is, the $1 million annual cap on crowdfunding will limit its usefulness for cash-intensive biotechs.

Editor's note: BioWorld will host a webinar July 31, 2012, on "JOBS Act Part II: What Role May Revised Rule 506 Offerings and Crowdfunding Play in Biotech?" For more information, visit bioworld.com or call (800) 477-6307 or (404) 262-5476. n