The Jumpstart Our Business Startups (JOBS) Act which the president has indicated he will sign into law, now that it has passed both the House and Senate will significantly impact small biotechs by providing new fundraising options and easing the burden of complying with securities laws. (See BioWorld Today, March 28, 2012.)
The most significant near-term impact is likely to come from the portion of the bill that allows private firms to raise up to $50 million publicly and trade their shares through the Regulation A pathway, according to William Hicks, partner with Mintz Levin.
The Regulation A pathway was previously capped at $5 million and thus rarely used, but boosting it to $50 million "could have an instant catalytic effect" on midstage biotechs that are running out of venture support, but aren't big enough for a traditional initial public offering (IPO) and are looking for an alternative to a reverse merger or Form 10 filing, Hicks said. (See BioWorld Insight, Nov. 21, 2011.)
Regulation A filers will be able to raise up to $50 million in an unregistered public offering of unrestricted shares, targeting anyone from venture funds and high net worth investors to mutual funds and nonaccredited retail investors. They are permitted to test the waters and solicit interest prior to filing their offering statement with the SEC, and while audited financials and periodic reporting are required, Hicks predicted the process will be "half as expensive" as an IPO. Additionally, while the company can trade its shares after the offering, it does not become a public reporting company, which lessens ongoing compliance costs.
Not everyone thinks the Regulation A boost will be a game changer. Canaccord Genuity Inc. investment banker David Schechner told BioWorld Insight last fall that he expects the cost of capital in Regulation A offerings to be high, because such deals are not likely to offer investors significantly reduced risk or increased liquidity over a private round, and it's already a buyer's market. Yet he called the option "one more arrow" in the biotech fundraising quiver, and he noted there is a whole group of investors "who like small, illiquid stocks."
Another section of the JOBS Act raises the number of shareholders that forces a company to start SEC reporting from 500 to 2,000, excluding employees. Tech companies like Google have fallen into that trap, and Hicks noted that if a company raised money through Regulation A and its investors started reselling shares, "you could get above 500 investors very quickly."
The other major capital formation pathway created by the JOBS Act is crowd funding. Musicians, filmmakers and other "creatives" already have tasted the potential of crowd funding through websites like RocketHub.com and KickStarter.com, but to date the creatives have only been allowed to offer perks like CDs or T-shirts in exchange for financial support. The JOBS Act allows private companies to get into the game, issuing up to $1 million in equity per year and essentially opening the private markets to nonaccredited investors. (See BioWorld Insight, Nov. 28, 2011.)
The Senate's last-minute tinkering with the JOBS Act was related largely to adding investor protections to that portion of the bill. The amount of money individuals can invest in a crowd-funded company is limited, to prevent people from losing their life savings. Companies seeking crowd funding have to provide financial statements and tax returns, while those raising $100,000 to $500,000 must have their financials reviewed by an accountant, and those raising more than $500,000 must have audited financials. The fundraising also must be conducted through an intermediary such as KickStarter.com, and Hicks said that provision will make it easier for the SEC to monitor crowd funding through such websites.
On the one hand, crowd funding might help start-ups bridge the valley of death by providing enough money to get out of academia and do the animal toxicology work needed to attract venture capitalists or pharmaceutical partners who can take the project to the next level. RocketHub's #SciFund Challenge last fall raised $50,000 for various science projects in its first 15 days online.
But there are plenty of hurdles that could prevent crowd funding from taking hold in biotech, including the complex subject matter, long-term investment horizon, high risk of failure and certainty that even if the crowd funders picked a winner, they'd face massive dilution. Even so, RocketHub founder Brian Meece told BioWorld Insight last fall that financial return isn't necessarily the best motivator for crowd funding anyway. "Most of the world has a little money to give and wants to feel good about it," Meece said.
Beyond capital formation initiatives, the JOBS Act loosens securities rules governing emerging growth companies with less than $1 billion in revenues, such as requiring only two years of audited financial statements prior to an IPO filing.
Hicks said the loosening of the regulations is a realization that, following the Enron debacle, Congress "overlegislated the process of operating a public company." The changes are mostly incremental positives, he said, but there are two that he sees as significant: First, emerging growth companies will be able to confidentially file registration statements with the SEC, which lets them prepare for a potential IPO without losing their leverage by publicly committing to carrying through, and second, emerging growth companies can reach out to investors and "test the waters" before filing a registration statement.
Hicks noted that companies like Puma Biotechnology Inc. and Coronado Biosciences Inc. recently completed what essentially amounts to a confidentially marketed IPO the firms completed private placements that culminated in the companies going public, the former through a reverse merger and the latter through Form 10. A lot of public investors will buy such deals, Hicks said, and letting companies reach out to those investors and gauge their interest can help determine what type of offering is the best fit.
"Some of these subtle changes will have a profound impact," Hicks predicted. But perhaps most important, he said, is the "clear, unequivocal message from Congress that we need to streamline."