Jobs Act 3.0 Explained: How it will Impact Business
2016 marked the all-time low in the last eight years for IPO filings. House Financial Services Chairman Jeb Hensarling, says,
“U.S. startups approached a 40-year low in 2016, and the number of domestic IPO’s, though making a comeback, is half what it was 20 years ago.”
Why the drastic change? The US went from an average of 400 IPO deals a year down to a quarter of that. What contributed to small businesses being unwilling or unable to secure their IPO’s, facilitating the growth and prosperity of the general economy and themselves?
Small businesses name a few obstacles to their growth, and ultimately, survival.
The Federal Trade Commission’s (FTC) and Sarbanes-Oxley’s (SOX) regulations concerning the IPO are some of the biggest factors. These regulations and tight deadlines make it extremely hard for the smaller startups to:
The above regulations cost small businesses a small fortune to comply with and leave them cash-strapped crippling their ability to operate.
Let’s talk briefly about the SOX act as it relates to IPO and the new regulations it introduced.
The Sarbanes-Oxley Act of 2002 is the regulation that was enacted as an answer to the accounting scandals of the early 2000’s. It was designed to promote corporate accountability and prevent another Enron or WorldCom that cost our economy billions of dollars. Additional regulations were created to prevent “creative accounting” in the future, but as a result, small businesses trying to IPO were adversely affected. The act introduced additional financial audits, security and compliance and reporting regulations.
Below are the key provisions of the act:
The passing of this bill is a deciding victory for the small business and the US economy. This bill promotes and invigorates the economic growth by reducing the cost of an IPO and creating more opportunities for the smaller guy to raise capital and attract more investors.
This is especially significant in the tech industry. Tech companies are notorious for not having enough funding to sustain the cost of the SOX audit and thus the IPO and continue operating at their usual level of profitability.
Often they require a late round of funding to have enough spare capital to pay for an IPO.
With the JOBS act 3.0 and the lower audit cost as well as the ability to secure financing from individual smaller investors it becomes much easier to file for IPO.
Did you know that the tech industry is the most frequently sued sector? With the IPO filings by tech companies steadily increasing year to year, it’s not surprising that the lawsuits follow.
A directors and officers insurance policy is a must-have for any company, especially one that is considering filing for an IPO. In fact, it is a requirement without which no investor will do business with your company. We recently covered the nuances of insurance for IPOs (we highly recommend you read it).
As the name implies, the policy is designed to protect the directors and officers as well as the entity. It becomes especially important when considering going public as there are so many more regulations to comply with.
The new JOBS 3.0 has made it easier to raise capital, attract investors and file for a public offering. However, it also increases the risk and liability of the directors and officers and thus the liability of the insuring carrier.
It’s essential to secure an appropriate D&O policy to protect your directors and officers as well as the entity itself, especially if you plan on filing for an IPO. With the lawsuits expected to increase in years to come following the new regulations, proper limits are essential. What limits should you get? We’d be happy to discuss your unique situation of review your current policy and offer our expert opinion.
If you’re considering an IPO or interested in learning more about a customized D&O insurance program, you can always reach out to a member of our team by phone 646.854.1058 or email email@example.com at any time. Or create an account here to get a quote!
Now more than ever, companies must safeguard their directors and officers — but how? Here’s an inside look at what drives D&O insurance prices.
Special purpose acquisition companies (SPACs) are growing in popularity — but they also face new exposures. Here’s how to manage SPAC risks.
Several tech companies have gone public simultaneously. After reviewing each, here are some lessons we can learn from the IPO rush.
Now is the time to rely on your broker and, in fact, test their ability to be the kind of representative who’ll work to protect the future of your business