Sens. Charles Schumer (D, N.Y.) and Pat Toomey (R., Pa.) last week introduced a bill seeking to make it easier for small companies to go public.
The proposed legislation grew out of recommendations from a task force of venture capitalists, public market investors, entrepreneurs, academics, investment bankers and attorneys. One member of the task force was Kate Mitchell, managing director at Scale Venture Partners and former chairman of the National Venture Capital Association.
“We’re really trying to smooth out the path to IPO for the Carbonites of the world or the Horizon Pharmas,” says Mitchell, drawing a distinction between smaller growth companies and the larger Zyngas and Groupons.
She says the bill could save young companies significant cash as they prepare to offer stock to the public. But information issues proved just as important to investors and CEOs as costs, says Mitchell.
The legislation is designed to exempt small companies from certain securities regulations, ranging from auditing to analyst research. Eligible companies under the bill could delay hiring outside auditors to examine internal controls and postpone shareholder votes on exec compensation. To qualify, a company must have less than $1 billion in annual revenue and less than $700 million in float after an IPO.
PeHUB had the opportunity to ask Mitchell about the new effort. Here is an edited transcript of the interview.
Q: Why draw the line at $1 billion in revenue and $700 million in share float?
A: The reason we chose those numbers is because we wanted it to be meaningful enough to really give companies an on-ramp. But we also wanted the SEC, Congress and the Administration to feel comfortable that it wasn’t a free pass for large companies.
Q: Wouldn’t these guidelines include the vast majority of the venture-backed companies with an eye on a public offering?
A: It would. It was intended to bring back the IPO as an exit. The reason that it’s interesting to policymakers is because there is so much job growth that occurs post IPO.
Q: Many people think of market cap as a good guide to company size. Why didn’t you use market cap instead of share float and revenue?
A: The reason we didn’t use market cap is because it’s hard to plan for. If the cutoff is $1 billion in market cap, you can have companies in hot sectors that, either pre or post IPO, trade over $1 billion in market cap for a week. Planning for revenue is predictable. I know when I’m in that ballpark (so) I know when need to start spending the money.
Q: Compliance costs related to the bill’s measures can be well above $2 million and sometimes above $3 million. When you discussed the bill with CEOs, how much savings did they and you expect to achieve?
A: When we took it back to CEOs, some said it was slightly more than 50%. But on average it ranged from 30% to 50%. So call it 40%. They’re saving a lot. But they still should be prepared to go public.
Q: The bill would eliminate the quiet period. Could you explain your reasoning?
A: Our view was it is artificial to have a quiet period. Institutional investors had two concerns when they came to the table. One was access to IPOs. The second issue was consistent information. They said (to me) you as a private investor get to have all this interaction with a company and…I have all this dark period…which might go on a year or longer. I get 45 minutes to make a decision in a roadshow. That is just not adequate.
Institutional investors were really the ones more than anybody else who were pounding the table on information both pre and post IPO.
Q: The bill also has a confidential period for S-1s. Could you explain how that proposal came about?
A: It was the CEOs who really liked the confidential filing aspect. It allows domestic companies to file privately with the SEC while the S-1 is being reviewed and before it is finalized, just like foreign issuers. The S-1, once finalized, becomes public. And the SEC can make all its comments public.