After a lackluster 2016, the market for initial public offerings shows signs of a revival in 2017. Simultaneously, the SEC has indicated a renewed interest in supporting IPOs under its new chair, Jay Clayton, who has stated that capital formation will be one of his highest priorities.
In the 2017 edition of its annual look at the IPO market, law firm Proskauer Rose reports that 20 IPOs were initiated in the first quarter of 2017, a substantial increase from just six during the same period in 2016. One possible reason for the resurgence in IPOs, the Proskauer lawyers suggest, is that “the market appears to be more comfortable with less financial information from emerging growth companies.”
Under the JOBS Act, emerging growth companiesare only required to file two years of audited financial statements in their IPO to ease their initial reporting, as compared to the three or more years of data required in many registration statements. In 2016, 75% of emerging growth companies took advantage of this option by filing two years’ worth of audited financial statements instead of three, a 92% increase since 2013. Furthermore, Proskauer reports, 60% of the emerging growth companies presented only two years’ worth of selected financial statements in 2016, while just 15% included five years’ worth.
Trends in SEC reviews seem favorable to IPO companies
According to the experts at Proskauer, the SEC seems to be relaxing its review somewhat in recent IPO filings. The SEC sent an average of four comment letters per company during IPO reviews in 2016, a 40% reduction since 2013 in the average number of SEC comments given in the first comment letter. “This decrease appears to be partially related to issuers receiving fewer boilerplate comments, i.e., comments that are not issuer specific and relate more to general process requirements,” explains the firm. Additionally, the option for new companies to have the SEC confidentially review their draft IPO (DRS-Draft Registration Statement) allows filers to hone their content prior to publicly filing, potentially decreasing the number of comments they receive.
The types of comments that the SEC staff has been issuing to IPO companies tend to vary by sector. Proskauer notes the following patterns in the topics of SEC comments directed to IPO filers during 2013–2016:
- 83% of IPO companies in technology, media, and telecommunications received comments on revenue recognition
- 66% of health-care companies received comments on cheap stocks
- 61% of companies in the industrials sector received operating-segment comments
In general, recent IPO filers have faced the same scrutiny of their non-GAAP financial measures that the SEC has directed at all filers. Among the 66 IPO companies in 2016 that the Proskauer lawyers studied, 47 (71%) disclosed at least one non-GAAP metric. For 55% of them, the SEC staff sent at least one comment about non-GAAP disclosures.
Capital formation is a high priority for the SEC’s new leadership
The SEC is undergoing a leadership transition in 2017 that seems likely to foster an even more favorable environment for IPOs. Unlike the Obama-era chair, former prosecutor and litigator Mary Jo White, the SEC’s newly confirmed chair is a transactional lawyer focused on mergers and acquisitions and public offerings. Jay Clayton is expected to focus more on improving capital markets than on the kind of enforcement that Mary Jo White had favored.
For example, in his opening statement at the confirmation hearing held by the Senate Committee on Banking, Housing, and Urban Affairs, he expressed his belief that “our public capital markets are less attractive to businesses than in the past” and that there is “meaningful room for improvement.” (For details about the SEC’s transition under Mr. Clayton, see the May 2017 issue of Dimensions.)
The SEC held an informative event in May 2017 that echoed the chair’s views. At New York University, the SEC’s Division of Economic and Risk Analysis (DERA) hosted a symposium with IPO stakeholders, titled Reviving the US IPO Market. The participants discussed the economic causes of the recent downturn in the IPO market and solicited ideas that might “encourage more capital-raising through IPOs.”
In his opening remarks at the conference, SEC Commissioner Michael Piwowar, the agency’s acting chair after Ms. White’s departure, reminded his audience that under the new chair, “making public capital markets more attractive to business while providing appropriate safeguards for investors will be a priority for the Commission.”
Commissioner Piwowar noted some IPO-friendly moves that the SEC made during his brief (yet active) interim leadership. “As a start, during my tenure as acting chairman, the Commission adopted amendments to conform our rules and forms to Title I of the JOBS Act,” he said. “Specifically, Title I of the JOBS Act provided an IPO on-ramp for emerging growth companies, allowing them to use scaled disclosure for a certain period of time. It also improved the information available for IPO firms by allowing analyst reports to be published during the quiet period.”
Perhaps most intriguingly, Commissioner Piwowar hinted at a renewed SEC interest in regulatory changes to serve the interests of IPO companies. “Both Chairman Clayton and I are especially interested in any suggestions for regulatory and other reforms that could be implemented to reverse the more-than-decade-long decline in US IPOs.”
For more information about how XBRL transforms financial data usage and how issuers are handling earnings releases and calls, download our June 2017 issue of Dimensions.