Encouraging Senate Bill S. 1933 and what it means for startups

Last December, legislation was introduced to Congress that would provide an easier path to IPO for startups—House bill 3606 and the identical Senate bill, S. 1933, the “Reopening American Capital Markets to Emerging Growth Companies Act of 2011.”  The bill, based on recommendations from an IPO Task Force led by past NVCA Chairman and our good friend Kate Mitchell, aims to increase American job creation and economic growth by improving access to the public capital markets for young companies.  HR 3606 has moved quickly and decisively through the House and is poised for passage this week, and if S. 1933 receives the same support in the Senate, the IPO landscape will significantly improve for entrepreneurs.

S. 1933 is important for startup founders because the current pathways to an IPO are so daunting that they are effectively closed to all but the largest “startups” such as Groupon or Zynga.  The constriction of access to public capital dates back to regulations passed in the late 1990’s and early 2000’s—most notably the Sarbanes Oxley Act of 2002 and the Dodd-Frank Act of 2009.  These bills were a reaction to the Internet stock market crash and were intended to protect investors.  However, regulation is a blunt tool for the market, and the unintended consequences of these regulations imposed costs and compliance requirements that priced an IPO out of reach for all but the largest companies.

S. 1933 is exciting because it seeks to remove these barriers for “Emerging Growth Companies” (EGCs)—companies that have less than $1 billion in annual revenues at the time of SEC registration.  S. 1933 provides founders with a temporary, scaled regulatory compliance pathway—an IPO “on-ramp”—that will reduce the costs of accessing public capital by giving EGCs up to five years from the date of their IPOs to scale up to compliance.

In addition to compliance issues, S. 1933 permits investors to have access to research reports about EGCs concurrently with their IPOs.  This is a hugely important element of the legislation, because by improving the flow of information to investors, S. 1933 intends to make the initial offerings of EGCs more transparent—a critical step in mitigating some of the risk for EGC founders and their new public investors.

EGCs are an enormously important subset of companies, and not just for the obvious economic growth benefits to our country.  It goes without saying that EGCs are typically found in the highest-growth segments of the economy—information technology, biotech and cleantech—and our country’s economic future depends on ambitious companies that have the ideas and passion to change the landscape of these markets.  But EGCs are more important for the broader solutions that innovation brings to the world.  Innovative companies are today solving the world’s largest problems such as climate change, clean water, hunger, and better and more affordable healthcare.  These companies need access to large amounts of capital from sophisticated, well-informed investors to accomplish their objectives.  Nationally and globally, we need these new companies to succeed, and our government is smart to recognize this in legislation like S. 1933.

Our goal at True Ventures is to make the world a better place for entrepreneurs and their teams.  For founders who aspire to build large, independent, self-sustaining companies, the IPO is an essential financing vehicle that enables a successful startup to chart its own course and to have a substantial social and economic impact.  Make no mistake, when we seek to ease a young company’s transition to an IPO, we are supporting economic recovery, global impact, and jobs—good jobs.  When 92 percent of a company’s job growth occurs after its IPO¹, there is no question that this legislation will enable sustained growth of America’s most promising industries.

We’re excited about S. 1933 because we believe the current regulation around IPOs severely hinders the long-term prospects of America’s most talented and ambitious entrepreneurs.  True Ventures is proud to stand alongside the NVCA and NYSE in support of this legislation.

¹Source: Venture Impact Study 2010 by IHS Global Insight, referenced in the IPO Task Force’s “Rebuilding the IPO On-Ramp,” October 2011.