In the past two weeks, a Sonoma County high-tech developer and a winery have filed plans to take their companies public and raise millions of dollars from investors.
They have something in common beyond their geography.
Truett-Hurst, a Healdsburg wine company, and Cyan Inc., a Petaluma technology firm, both chose to file as "emerging growth companies," a new category that was created under the JOBS Act -- short for Jumpstart Our Business Startups.
Enacted a year ago, the JOBS Act was designed to ease companies' access to capital markets by making it less expensive and onerous to comply with the regulations required of public companies. It was pushed by Silicon Valley venture capitalists, who argued it would spur economic growth by enabling companies to raise the funds they need to expand and create new jobs.
But critics say the JOBS Act hasn't accomplished that goal. They say it risks eroding important protections that were put in place after the Enron scandal by reducing the amount of information public companies have to file with regulators, and by relieving companies of requirements like giving shareholders a say on executive compensation and "golden parachutes."
The Council of Institutional Investors, a nonprofit association of pension funds, endowments and foundations with combined assets that exceed $3 trillion, warned investors that they would find significant erosion of mandatory disclosures and shareowner rights when dealing with companies that filed as "emerging growth companies."
But backers of the act like Bill Hambrecht, whose San Francisco firm WR Hambrecht + Co. is underwriting Truett-Hurst's public filing, say something needed to be done to simplify the IPO process to help smaller, venture-backed companies access capital markets in a way that isn't cost-prohibitive.
"The motivation of the JOBS Act was to allow smaller companies to go public," said Hambrecht, who is a co-owner at Truett-Hurst. "And the rationale was pretty simple. There's been thousands and thousands of small companies started by VC investors and angel investors . . . and for the last decade, about 95 percent of them would end up -- when they came to going public or selling out -- would end up selling out."
Companies backed by venture capitalists reach a point when they have to pay back their original investors, Hambrecht explained. They're often faced with the decision to either raise money from the public through an IPO or to sell the company to a larger competitor. Those that choose the IPO route typically create jobs, while those swallowed up by a merger typically contract because of staff redundancies, Hambrecht said.
"If you look at Apple and Google and people like that, the real expansion in job creation came after they went public," said Hambrecht, whose investment banks helped underwrite both of those companies' IPOs.
A year after the JOBS Act went into effect, nearly three quarters of all companies that filed IPOs identified themselves as emerging growth companies, according to an analysis by Latham & Watkins, a law firm that was instrumental in drafting the legislation. The firm found that 184 companies took advantage of the relaxed rules.
Big small companies
Proponents say the law was designed to help smaller companies. But a company can qualify with up to $1 billion in annual revenues. And some of the companies that have filed as emerging growth companies include so-called "shell companies" that don't have any assets but are designed to serve a business purpose such as check writing or creating a tax haven, according to media reports.
"There wasn't a lot of strong basis for determining the definition and the amounts," said Jeff Mahoney, general counsel of the Council of Institutional Investors. "That was not something that there was a lot of deep thought about as to where the line should be drawn."
So far, almost 85 percent of the companies that filed as emerging companies in the last year had less than $250 million in annual revenues, according to a report by Latham & Watkins.
Mary Shapiro, who was chairwoman of the Securities and Exchange Commission when the act passed, opposed many provisions of the law. She said the definition of an emerging growth company was so broad that it would eliminate important protections for investors in even very large companies.
The companies that have filed also aren't necessarily new, Mahoney said.
"We've seen some companies that have been in existence for a long time, like Manchester United, the soccer club," Mahoney said. "They registered as an emerging growth company. I think they've been in existence for hundreds of years."
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