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A confidential JOBS Act IPO: CNBC Explains

Friday, 13 Sep 2013 | 2:36 PM ET
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The Jumpstart Our Business Startups Acts—more commonly known as the JOBS Act—was signed into law on April 5, 2012, after passing through Congress with bipartisan support. One of the goals of the law was to ease the process of young, growing companies raising funds from the public.

The law created a new category of securities issuers called emerging growth companies (EGC). This category has been immensely popular with companies looking to sell shares. During the first year after the JOBS Act was passed, 75 percent of companies completing initial public offerings were classified as emerging growth companies, according to a study by the law firm Latham & Watkins.

(Read more: What is a "road show"?)

One of the advantages of qualifying as an EGC is the ability to negotiate with the Securities and Exchange Commission behind the scenes, out of the glare of public markets. EGC's may elect to submit a draft registration statement with the SEC on a confidential basis.

This means that the public doesn't witness the public back-and-forth between the company and regulators over the content of the registration statement. According to the Latham study, 65 percent of companies that eventually publicly file a registration statement with the SEC during the first year of the JOBS Act had previously submitted a confidential statement.

Eventually, however, the back-and-forth will come out. When EGC's file public registration statements, they attach their draft registration statements as exhibits.

The JOBS Act also eases the financial disclosure rules for an EGC. At the time of the IPO, an EGC is required to provide only two years of audited financial statements; under the older rules, companies had to provide three. In addition, unaudited financial data need stretch back only two years rather than five.

(Read more: An IPO surges 57 percent, CEO thanks Washington)

Companies taking advantage of the JOBS Act rules also do not have to disclose very much at all about executive compensation, although they must explicitly say that they are using this provision of the act.

In addition, the act allows EGC's to take a five-year opt out of compliance with the Sarbanes-Oxley rules that require executives to assess the effectiveness of their internal controls over financial statements, providing their market capitalization doesn't exceed statutory levels.

Latham's study found that a typical EGC makes two confidential submissions to the SEC before its first publicly filed registration statement. The road show in which companies market their securities to investors begins on average 126 days from the first public filing, with pricing of the securities taking place 10 days later.

At minimum, companies must wait 21 days after their first public filing to start their road show. On average, they wait 49 days, according to Latham.

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