Jumpstart Our Business Startups Research Articles

The impact of the JOBS act on the costs of going public: evidence from long-term audit costs

The Jumpstart Our Business Startups (JOBS) Act (2012) allows reduced compliance costs for IPOs with less than $1 billion in revenues. While prior research has focused on the Act’s ability to reduce short-term IPO compliance costs, we investigate how the Act affected key observable compliance costs – audit fees – over the five years the issuing firm is eligible for this reduced level of disclosure/compliance. In contrast to prior findings of increased short-term audit costs, we find that long-term audit costs decreased by 16.6 percent, or $172,000 for IPO firms following JOBS, relative to the change fees for in control firms unaffected by the regulation. After investigating other consequences of the Act, we find greater information uncertainty for affected firms following JOBS. However, we find lower accrual-based earnings management as responses to these information frictions. We find the reductions in earnings management is driven by firms with the greatest information uncertainty with investors, suggesting that affected firms take additional steps to mitigate the information risks in light of their inherently riskier IPOs. Overall, we present a fuller picture of the costs/benefits and risk mitigation in post-JOBS IPOs.

How does the JOBS act affect the rule 144A market?

AbstractIn this article, we examine the effects of Title II of the Jumpstart Our Business Startups (JOBS) Act on the cost and issue size of Rule 144 debts for a sample from 2002 to 2019. We find that after the enactment of the JOBS Act, the average cost (issue size) of the Rule 144 A offers decreases (increases) significantly. The findings are robust after controlling for issue‐, issuer‐, and country‐specific characteristics as well as market conditions. Evidence based on the propensity‐score‐matched sample, including public debt issues, subsample analyses, difference‐in‐differences tests, and alternative event windows, further shows that domestic firms benefit more from the JOBS Act as they have a greater reduction in the cost of debt and increase in the issue size. Overall, our results are consistent with the increased investor base hypothesis and suggest that Title II of the JOBS Act satisfies Congress's goal of making it more cost efficient for Rule 144 A issuers.

Privileged information access, analyst consensus building, and stock return volatility: Evidence from the JOBS Act

This study examines whether allowing select analysts private access to management before an IPO affects analyst consensus building and subsequently post-IPO stock return volatility. The 2012 Jumpstart Our Business Startups (JOBS) Act creates many exemptions to reduce the cost of going public for smaller issuers that qualify as an Emerging Growth Company (EGC). One set of provisions allows analysts affiliated with an EGC's underwriters to communicate privately with management and potential investors before the IPO. Using a sample of IPOs during 2001–2022, we find that the dispersion in affiliated analysts' initiation forecasts is significantly higher for EGCs than similar IPOs in the pre-JOBS period. A path analysis reveals that the JOBS Act indirectly contributes to the heightened post-IPO stock return volatility through the mediating role of forecast dispersion among affiliated analysts. Our exploratory analyses suggest that more significant variations in affiliated analysts' social connections and their workload tend to be associated with higher forecast dispersion. Overall, our findings indicate that having privileged access to management could reduce consensus among analysts, which can increase post-IPO stock return volatility in EGCs.

Disclosure and Lawsuits Ahead of Initial Public Offerings

ABSTRACTWe examine whether initial public offering (IPO) registration disclosures expose firms to greater nonshareholder litigation risk. Using hand-collected data on lawsuits initiated at federal and state courts against IPO firms, we show that firms that submit their IPO registration statement with the Securities and Exchange Commission publicly experience a 16 percent increase in litigation risk between the registration filing and issuance date. Consistent with the public filing of the registration driving this heightened litigation risk, firms that file their registration confidentially under the Jumpstart Our Business Startups (JOBS) Act do not experience such an increase in litigation risk. The effects of confidential filing are concentrated among business-initiated lawsuits, intellectual property/contract lawsuits, and potentially meritless lawsuits. We find no disproportionate increase in lawsuits after an IPO for confidential filers, suggesting that withholding information during the IPO registration period mitigates litigation risk.JEL Classifications: G32; K20; K41; M41.

Deregulating Innovation Capital: The Effects of the JOBS Act on Biotech Startups

Abstract We examine real outcomes for biotech startups going public around the Jumpstart Our Business Startups (JOBS) Act. Reduced compliance costs associate with greater innovation capital formation as biotech IPO volume and proceeds increase after the JOBS Act. Biotechs, which conduct over 30% of IPOs since 2012, go public with products earlier in the FDA approval process and more frequently target rare diseases and cancer. Consistent with our survey evidence that managers use compliance savings to invest in R&D, we link the JOBS Act to post-IPO increases in project-level development, such as new patents, clinical trials, and staffing of laboratories. Post-JOBS Act product candidates are more likely to reach key milestones in the FDA approval process and these startups fail at lower rates. Benefits accrue to shareholders without sacrificing financial reporting quality. Our results demonstrate how tailoring regulations for startups can provide economic and societal benefits. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Public and Private Information: Firm Disclosure, SEC Letters, and the JOBS Act

This paper examines the impact of the recently passed Jumpstart Our Business Startups (JOBS) Act on the behavior of market participants. Using the JOBS Act — which relaxed mandatory information disclosure requirements — as a natural experiment on firms’ choices of the mix of hard, accounting information and textual disclosures, we find that relative to a peer group of firms, initial public offering (IPO) firms reduce accounting disclosures and change textual disclosures. Because it allows a partial revelation of IPO quality, only textual disclosures affect underpricing. We also find that the Securities and Exchange Commission (SEC) changes its behavior post-JOBS Act in responding to draft registration statements. Specifically, the SEC’s comment letters to firms are more negative in tone, and more forceful in their recommendations, focusing on quantitative information. Finally, under the JOBS Act, investors place more emphasis on the information produced by the SEC when pricing the stock. Returns following public release of the letters vary by about 4% based on letter tone.

The impact of reducing reporting requirements on audit quality, auditor effort and auditor conservatism

Purpose This study aims to examine the effect of reducing disclosure and auditing requirements on audit quality, auditor effort and auditor conservatism. The Jumpstart Our Business Startups (JOBS) Act of 2012 is used as a setting for this research. The JOBS Act aimed to boost economic growth by easing emerging growth companies’ (EGCs) access to capital markets. The Act provides scaled disclosure and auditing provisions and exemptions for EGCs. Design/methodology/approach Using data from Capital IQ, CRSP and Audit Analytics on EGCs and matching non-EGCs between 2012 and 2018, this study assesses the effect of such reduced disclosure and audit requirements on audit quality, auditor effort and auditor conservatism. Findings The findings denote that while audit quality and auditor effort are lower for EGCs, auditor conservatism is not different for EGCs as compared to non-EGCs. Originality/value This study expands the current research by providing evidence on the impact of reduced reporting and auditing requirements on auditor conservatism and audit quality, in addition to auditor effort in EGC engagements.

Pre-IPO Meetings and Analyst Consensus Building

We examine whether the consensus among affiliated analysts covering IPO firms changes after the 2012 Jumpstart Our Business Startups (JOBS) Act. The JOBS Act allows only affiliated analysts to attend pre-IPO meetings with managers of IPO firms that qualify as an Emerging Growth Company (EGC). Much of the information from these meetings is likely to be verbal and non-verbal cues from managers. While verbal and non-verbal cues contain value-relevant information, it is not clear how their high degree of subjectivity affects analyst consensus building. Using a sample of 660 IPOs during 2004-2016, we find that the dispersion of affiliated analysts’ initiation forecasts is significantly higher and is associated with larger post-IPO return volatility for EGCs than for similar IPOs prior to the JOBS Act. These findings do not extend to unaffiliated analysts covering EGCs. Further analysis suggests that variation in social connections may contribute to the higher dispersion among affiliated analysts after the JOBS Act. Our findings indicate that having privileged access to EGC management through pre-IPO meetings allows affiliated analysts to form highly subjective assessments, which may have the unintended consequence of contributing to increased information uncertainty for EGCs.

Disclosure, Firm Growth, and the JOBS Act

We study the effects of regulatory disclosure on investment and growth by comparing newly public firms before and after they lose disclosure exemptions under the Jumpstart Our Business Startups (JOBS) Act. Exempt firms invest more in physical assets, innovation, and acquisitions than firms that lose exemptions, but experience steeper declines in growth opportunities over time. Firms that lose exemptions exhibit better allocation of equity to investments and utilization of existing assets, which improves their Tobin’s q. Relaxing disclosure requirements seems to induce inefficiencies in managerial investment decisions and hence inhibits firms from exploiting or replenishing their growth opportunities.

Do the Burdens to Being Public Affect the Investment and Innovation of Newly Public Firms?

We examine how regulatory burdens affect the investment and innovation of newly public firms. To do so, we exploit the Jumpstart Our Business Startups (JOBS) Act, which eliminates certain disclosure, auditing, and governance requirements for a subset of newly public firms. Firms treated with these reduced burdens invest more and more efficiently after going public relative to untreated firms. These findings are concentrated in innovative investments and are nonexistent in dual-class firms. Overall, our findings suggest that the burdens to being public exacerbate agency frictions, which lead managers to take on fewer risky projects. This paper was accepted by Suraj Srinivasan, accounting.

Deregulating Innovation Capital: The Effects of the JOBS Act on Biotech Startups

We examine the effect of the Jumpstart Our Business Startups (JOBS) Act on biotech startups, who conduct almost 40% of IPOs since 2012. Reduced compliance costs encourage innovation capital formation as biotech IPO volume increases 200% and proceeds rise by 30%. After the JOBS Act, biotech startups go public significantly earlier in the FDA approval process, more frequently target rare diseases and cancer, and exhibit higher employment growth. We find no increase in failure rates, financial restatements, or internal control weaknesses, suggesting that startup quality is not compromised by compliance exemptions. We also introduce novel survey evidence quantifying eventual compliance costs. Our results demonstrate how regulatory exemptions can provide important economic and societal benefits.

Gatekeeping the Gatekeepers: The Need for a Licensing Requirement for Crowdfunding Portals in the Wake of the DreamFunded Decision

Most people are familiar with crowdfunding sites such as Kickstarter and GoFundMe—sites that allow users to part with their money in exchange for products or donate their capital to organizations they believe in. However, these sites have one trait in common: they do not offer contributors equity or a promise for future profits. For a long time, selling equity meant complying with the costly requirements of federal securities laws, which was cost-prohibitive for many small businesses; it was illegal for businesses to offer equity over a site in the way businesses on Kickstarter offered products. The Jumpstart Our Business Startups (JOBS) Act changed that. Small businesses, initially precluded from raising capital through the promise of equity, could do so now. However, the passage of the JOBS Act came with a number of requirements for businesses trying to sell equity via crowdfunding. In particular, these businesses could not offer their equity through just any Internet site. They had to do so through a registered intermediary—a gatekeeper to the equity crowdfunding scene. These intermediaries came in two types: broker-dealers (a familiar party in securities law) and a new statutorily created entity called a “funding portal.” Funding portals have many requirements imposed on them, but unlike broker-dealers, they are not required to be licensed to act as an intermediary. The absence of a licensing requirement for funding portals is problematic. The first litigated case involving a funding portal, Department of Enforcement v. DreamFunded Marketplace, LLC, presented that the lack of a licensing requirement threatens the twin purposes of the JOBS Act: capital formation and investor protection.

IPO Regulation and Initial Capital Structure: Evidence from the JOBS Act

We examine capital structure implications of newly public firms' availing themselves of regulatory exemptions. Title I of the Jumpstart Our Business Startups (JOBS) Act provides newly public firms broad-scale regulatory relief but limits the benefits to a certain subset of firms named Emerging Growth Companies (EGCs). One of the EGC criteria is based on a $700 million public float threshold. We find evidence that firms appear to bunch up their public float at IPO issuances below the $700 million threshold and repurchase their shares after the issuances to be eligible for the EGC status. Firms staying below the threshold are more likely to substitute public equity with debt. We further find that the leverage effect persists over time (the leverage ratchet effect) even when EGCs lose their status.

Raising Equity under Deregulation: Evidence from the JOBS Act

The Jumpstart Our Business Startups (JOBS) Act has not led to a sustained recovery in IPO activity, but to poorer-quality firms raising public equity. Firms going public under the Act are largely cash-starved, pay dearly to raise equity, and often rely on further public issues to avert financial distress. Proceeds raised are used to do more hiring, repay debt, and boost executive pay, but not to increase investments. Many firms lose exemptions sooner than allowed by the Act, whereupon they face higher compliance costs. The JOBS Act has not revived public equity markets and may have even undermined their attractiveness.

Does the JOBS Act Reduce Compliance Costs of Emerging Growth Companies? Theory and Evidence

SUMMARYIn April 2012, the Jumpstart Our Business Startups (JOBS) Act was enacted to revitalize the initial public offering market by reducing regulatory burdens for small firms. We focus on audit fees, one directly observable and significant cost of complying with the JOBS Act. Specifically, we examine whether the exemption of emerging growth companies (EGCs) from SOX 404(b) auditor attestations of internal control over financial reporting and other disclosure requirements affected audit fees paid by EGCs. We find that EGCs paid higher audit fees than non-EGCs after IPOs. Moreover, we find that the positive relation between EGCs and audit fees is more pronounced for firms with high financial reporting risk. Collectively, our results reveal an unintended consequence of the JOBS Act: it failed to reduce audit fees, a major component of the compliance costs of EGCs.

The effect of the JOBS act on analyst coverage of emerging growth companies

PurposeThe purpose of this paper is to examine the section of the Jumpstart Our Business Startups (JOBS) Act related to information dissemination by sell-side security analysts. The paper analyzes how the abolishment of the quiet period requirements for emerging growth companies (EGCs) changes the analyst initiation timing and market expectation of and reaction to the issuance of the analyst recommendations.Design/methodology/approachThis paper considers the effect of the abolishment of the quiet period requirements on analyst coverage initiations for EGCs with IPOs between January 2006 and December 2015 using regression analyses and probability models.FindingsThe results confirm the current anecdotal and empirical evidence that a shorter, de facto, quiet period exists. Analyst issue stronger average ratings for EGCs than for similar firms with IPOs before the JOBS Act. EGCs with initiations from multiple analysts also experience stronger positive market reaction than the firms with initial offerings before the JOBS Act. The market seems to anticipate which EGCs will have initiations and particularly which EGCs will have initiations from multiple analysts. The investors, however, do not fully anticipate the strength of actual recommendations.Practical implicationsThis paper is important for researchers, practitioners and policy-makers to understand how analysts impact the financial markets, how timing of analyst initiations affects stock prices of EGCs and what firm characteristics play a role in securing analyst coverage shortly after initial offerings.Originality/valueThis paper adds to the emerging literature on consequences of and changes brought by the JOBS Act. Specifically, this paper extends the limited literature on analyst initiations issued for firms with IPOs following the JOBS Act, timing of those initiations and magnitude of the market’s response to the initiations.

Pre-Ipo Communications, Analyst Forecast Dispersion, and Post-Ipo Information Uncertainty: Evidence from the 2012 Jobs Act

The Jumpstart Our Business Startups (JOBS) Act creates many exemptions to reduce the cost of going public for smaller issuers that qualify as an Emerging Growth Company (EGC). One set of provisions allows analysts affiliated with EGCs’ underwriters to communicate privately with management and potential investors before the IPOs. Our study examines whether such provisions affect EGCs’ post-IPO information uncertainty. Using a sample of 853 IPOs during 2004-2016, we find that the dispersion in analysts’ initiation forecasts is significantly higher for EGCs compared to similar IPOs in the pre-JOBS period. This higher dispersion is largely driven by affiliated analysts and is associated with larger post-IPO return volatility. Further analysis suggests that larger variations in affiliated analysts’ soft skills are associated with higher forecast dispersion after the JOBS Act. Overall, our findings indicate that allowing affiliated analysts the option of pre-IPO private communications may contribute to increased information uncertainty for EGCs.

The emerging growth company status on IPO: Auditor Effort, Valuation, and underpricing

The Securities Act of 1933 governs the going public process and the accompanying registration statement submissions to the Securities and Exchange Commission (SEC). The Jumpstart Our Business Start-ups (JOBS) Act of 2012 created several accommodations under the SEC securities laws for a new group of companies referred to as “emerging growth companies” (EGCs). We examine the associations between auditor effort, initial public offering (IPO) offer prices, and investors’ perceptions of the registrants’ intrinsic value (underpricing) and EGCs’ registration statements utilizing accommodations to reduce financial statement information disclosure. Our finding that auditor effort is reduced suggests that the potential for increased auditor risk for EGCs future financial statements could be higher because of issues related to financial statements not included in the registration statements. We also find a negative (positive) association between EGC filing and IPO offer prices (underpricing). Our results suggest potential unintended consequences associated with EGCs and that auditor effort might not be sufficient to reduce the possibility of future financial statement failures.

Information design and capital formation

Could a firm benefit from not disclosing all of its private information before its stock is traded in public financial markets? So long as the investors' marginal utility function is convex and the investors differ only in their risk-sharing needs, three substantive results hold: (1) a full disclosure policy minimizes the value of the firm; (2) lifting a mandate of full disclosure does not imply that firms will necessarily choose to withhold information maximally; and (3) with many firms that strategically choose disclosure policies, all Nash equilibria display only partial disclosure. Our insight is based on the role that the firm's equity can play as a risk-sharing device: if the firm chooses to keep some information private, its stock can be used by investors to hedge against risk.The problem that we study is of theoretical interest, but it is also topical: the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April 2012, substantially eases securities regulations for small companies going public. The declared intent of this change in regulation was to promote capital formation in new and small companies. Our results indicate that the provisions of this new legislation are in line with its intentions. Less stringent requirements on information disclosure for smaller firms may also benefit investors.

US Equity Crowdfunding: A Review of Current Legislation and A Conceptual Model of the Implications for Equity Funding

Recent Securities and Exchange Commission (SEC) guidelines provide a regulatory framework for Title II of the Jumpstart Our Business Start-ups (JOBS) Act of 2012, that legalised interstate equity crowdfunding (ECF) in the USA. Concurrently, 18 states have passed legislation or regulations to allow intrastate ECF. Yet, the literature has not fully addressed what this nascent funding mechanism will offer to investors and those seeking funding for entrepreneurial projects in the USA. This article reviews current US legislation and the federal and state laws as they pertain to ECF. It also discusses the anticipated implications of ECF, provides a conceptual model that demonstrates how crowdfunding can change the traditional equity-financing continuum and discusses externalities that may emanate from implementation of this relatively new means of raising capital.