How effective has the Jumpstart Our Business Startups Act been at spurring unregistered offerings of debt and equity securities?
The division of economic and risk analysis (DERA) of the Securities and Exchange Commission released a report late Tuesday that attempted to provide some statistical evidence for the debate. Congress directed the SEC to compile the report to assess the impacts of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The report found that total capital formation from the signing of the Dodd-Frank Act into law in 2010 through the end of 2016 was approximately $20.20 trillion, of which $8.8 trillion was raised through registered offerings and $11.38 trillion raised through unregistered offerings.
Private market issuance of debt and equity (unregistered offering activity) increased substantially from $1.16 trillion in 2009 to $1.87 trillion in 2015, amounting to $1.68 trillion in 2016, the report found. Amounts raised through exempt securities offerings of debt and equity for 2012 through 2016 combined exceeded amounts raised through registered offerings of debt and equity over the same time period by about 26%.
Here’s what DERA found with regard to the different offering types amended or created by the JOBS Act:
Title II. Amounts raised using the general solicitation rules under Title II of the JOBS Act, which were implemented in September 2013, remained low, representing only 3% of total amounts raised pursuant to Rule 506, DERA found.
From September 23, 2013, to December 31, 2016, a total of 5,374 issuers disclosed in their Forms D that they initiated 5,474 new Rule 506(c) offerings.
Title III. Overall, initial evidence on Title III crowdfunding market activity suggests that some small, pre-revenue growth firms are beginning to use crowdfunding as a securities offering method. Based on EDGAR filings of the disclosure forms required for crowdfunding, DERA found that between May 16, 2016 (when crowdfunding was legalized), and December 31, 2016, there were 163 unique offerings by 156 issuers. Of those, 28 reported meeting their target amount as of the end of 2016.
The median offering during that period targeted a capital raise of $53,000 and the average offering a raise of $110,000. Of the offerings that reported having raised at least the target amount, the median amount reported raised was notably larger, at approximately $171,000, with an average of $290,000. DERA cautioned that more time is needed to assess the usage of Title III crowdfunding.
Title IV. The initial data suggest that Title IV, which amended Regulation A offerings, has been the most successful part of the JOBS Act. Amendments to Regulation A initiated by Title IV of the JOBS Act were followed by a large increase in Regulation A offering activity over the initial 18 months after the rules went into effect.
In the years 2005 to 2016, in a typical year there were about 14 qualified Regulation A offerings seeking to raise about $163.3 million. But activity has accelerated in the last two years. There were 97 qualified offerings seeking to raise $1.8 billion in the period of June 19, 2015, to December 31, 2016, DERA found. Based on issuer reports of amounts raised during 2005 to 2016, DERA estimates that during that period 56 issuers reported positive proceeds in these so-called Regulation A+ offerings, totaling approximately $314.6 million.
“Early signs indicate that amended Regulation A may offer a potentially viable public offering on-ramp for smaller issuers as an alternative to a traditional registered IPO and offer either an alternative or a complement to other securities offering methods that are exempt,” according to the DERA report.
The 315-page DERA report also examined the performance of the public offering markets. Regarding initial public offerings, it found that small-company IPOs have increased somewhat. IPOs with proceeds up to $30 million accounted for approximately 17% of the total number of IPOs in the period 2007 to 2011. Following the passage of the JOBS Act, in the period 2012 to 2016, IPOs of that size constituted 22% of the total.
DERA noted that “the importance of exempt capital markets as a source of financing in the economy is underscored by the fact that less than 0.02% of the estimated 28.8 million firms in the United States are currently exchange-listed firms.”