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SEC Looks to Improve Access To Markets for Small Companies

By Peter Winter
BioWorld Insight Editor

There is plenty of evidence to suggest that small and emerging biotechnology companies could significantly benefit from modifications to the existing SEC rules and regulations affecting their access to the capital markets.

Front and center has been the burden placed on smaller companies to comply with the Sarbanes-Oxley (SOX) Act, enacted 10 years ago to increase investor protection. Last year, the SEC found that the cost of complying with Section 404 of SOX was almost $1 million for companies with a public float between $75 million and $250 million. (See BioWorld Today, July 30, 2012.)

That was one of the reasons that the bipartisan Jumpstart Our Business Startups (JOBS) Act was signed into law April 5 to help revive the U.S. IPO market, which has been under scrutiny because of the diminishing number of companies taking the plunge to become public entities. This subject was high on the agenda of the SEC Advisory Committee on Small and Emerging Companies, which met in San Francisco Friday. The committee, among other things, reviewed several critical issues that need to be addressed to build a renewed confidence in the IPO market and encourage economic growth and job creation.

The advisory committee was formed last year to provide a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization of less than $250 million.

The committee, which typically meets at the SEC's Washington headquarters, said the meeting was held on the West Coast in order to hear from a different pool of small business representatives and learn more about the issues affecting the region.

"Our capital markets are a critical source of funding for emerging companies and smaller public companies," said SEC Chairman Mary Schapiro, commenting on the formation of the committee. "That is why a key component in our agency's mission is to facilitate capital formation while at the same time protecting investors. This new advisory committee will increase the input we receive from the small business community."

'Where Have All the IPOs Gone?'

One of the speakers at the meeting was Jay Ritter, Cordell Professor of Finance, Warrington College of Business Administration, University of Florida, who described his research published in a paper titled "Where Have All the IPOs Gone?" provided as part of the background documentation released ahead of the meeting.

His data indicated a disturbing trend showing that in the last decade the number of companies going public has numbered around 100 per year, well down from the 300 or so that took place annually during the period from 1980 to 2000. While regulatory compliance costs and unwelcoming public markets have contributed to some of the decline in new issues, his research has led to an alternative explanation. Rather than going public, companies are partnering or being acquired by larger organizations, which can help speed a product to market.

In addition, small company IPOs have had declining profitability, consistently low returns for public market investors, and so companies have tended to seek an acquisition rather than heading to the public market.

Another factor, described in a recently released paper by Grant Thornton and available for the meeting, argued that "adding back adequate economic incentives (through higher tick sizes, the minimum increment in which a stock or other security can trade) to make the aftermarket support of small public companies once again profitable is likely the best way to achieve Congress's intent to bring back the small IPO and associated job growth."

Section 106(b) of the JOBS Act called on the SEC to conduct a study within 90 days of enactment examining the effects of decimalization on IPOs and small and middle capitalization companies – and a report was issued in July.

The report said it was difficult "to draw any strong conclusions from available studies with respect to potential adverse effects of the change to decimals a decade ago on small and middle capitalization companies today."

After reviewing the information, the staff recommended that the commission should not proceed with the specific rulemaking to increase tick sizes but "should solicit the views of investors, companies, market professionals, academics and other interested parties on the broad topic of decimalization."

To that end the report believes a roundtable would be a good method to continue dialogue on this issue.

IPO Queue Getting Longer

The meeting was conducted against a backdrop of optimism surrounding the IPO market with the biotechnology IPO runway queue getting longer following the news Intercept Pharmaceuticals Inc. had filed an S-1 registration statement with the SEC. That firm become the third biotech in three weeks to add itself to the IPO runway, following closely behind the S-1 filings of Regulus Therapeutics Inc. and OvaScience Inc. (See BioWorld Today, Sept. 6, 2012.)

Although it is still early days, the JOBS Act appears to be having the desired effect with more than 50 emerging-growth companies filing new S-1s or amending their filings. About 25 percent of those are biotech companies. According to BioWorld Snapshots, there are currently nine biotech companies on the IPO runway, and four biotech companies have gone public since April.