What You Should Know About the JOBS Act
Public reaction—plus where to go from here.

by Dee Mirando-Gould, Director, MorganFranklin

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. The act is designed to:

• Make it easier for small businesses and entrepreneurs to access capital.
• Help more small businesses go public, which is intended to attract new investors and allow small businesses to grow and create jobs.

What People Are Saying
There has been a great deal of press surrounding the JOBS Act.

Here is what some are saying about the benefits:

• Job growth is fueled by initial public offerings (IPOs), and the act will make it easier for companies to go public. Therefore, more companies will pursue IPOs and more jobs will be created. The results of one study showed that 92% of the job growth for venture capital backed companies occurred after their IPOs. [1]
• Many businesses will qualify for emerging growth company (EGC) status, which means the cost of going public will be significantly reduced. About 90% of companies seeking to go public in the U.S. fit the description of an EGC, including some recent high-profile IPOs such as LinkedIn and Pandora Media.
• Companies will have an easier time attracting seed capital due to the legalization of crowdfunding.
• The act will provide private companies more flexibility in issuing stock to employees as compensation because these shareholders will no longer be counted among record holders who could trigger public registration.

In contrast, some have expressed concerns about the JOBS Act:

• Valuations could be lower for EGCs if investors demand a risk premium for accepting less regulatory protection.
• IPOs will be measured by how they trade in the aftermarket. If investors are hurt by the lack of investor protections, confidence in IPOs may decline and there could be fewer IPOs, not more.
• The act relaxes certain regulations that were designed to minimize fraud and other irregularities. Consequently, fraud could increase.
• The test-the-waters provision of the act could compromise the independence of firms’ research and leave them open to investor lawsuits around IPOs they underwrite.
• Crowdfunding may provide more opportunities for con artists to scam small investors.
• The act undermines the independence of accounting and auditing standard-setting by the FASB and PCAOB. Both boards already have the authority to consider different approaches for various classes of issuers, if appropriate.

What You Should Do Next
The bottom line is that no one knows what effects the JOBS Act will have. However, it makes some significant changes to existing regulations, so companies should keep the following in mind:

• Consider the company’s capital needs in light of the revised regulations.
• Determine whether it is worthwhile to become an EGC by considering when the company is likely to exit EGC status (e.g., when it reaches $1 billion in annual revenues).
• Evaluate the company’s employee stock compensation plans. There may be opportunities to revise these plans to better align them with the company’s strategic objectives.
• According to Audit Analytics, since 2004, there have been 563 financial restatements among 1,827 companies that recently went public—or approximately 31% of the companies that went public during that period. [2] This statistic demonstrates that newly formed public companies might need more attention on accounting and controls rather than less. With the relaxation of requirements for EGCs, restatements are likely to increase. Therefore, evaluate the complexity of the accounting rules to which the company is subject. Having the right resources to address complex accounting transactions will be important to avoiding financial restatements.
• Evaluate the effectiveness of the company’s internal controls over financial reporting (ICFR). An EGC still has to comply with the Sarbanes-Oxley (SOX) Act Section 404(a) requirement to have management assess its ICFR.
• Research and understand the potential market for the company’s stock. For example, investors might expect to see an attestation report on ICFR in the company’s annual filing; consequently, it might not help the company to be an EGC.
• Consider whether potential investors will expect a risk premium for investing in an EGC, which could result in a lower valuation for the company in its IPO.

Have questions about the JOBS Act and how it impacts you? Need help deciding what to do next? Contact our experts at AccountingSupport@morganfranklin.com.