Hungrier Investors, Loosened Regulations Could Spur More Local IPOs

Not every startup’s path to Wall Street will take it through the White House Rose Garden, but the journey could be made shorter, easier, and cheaper thanks to legislation signed there last year, as the CEOs of two startups based in Colorado have learned.

On April 5, 2012, President Barack Obama signed the Jumpstart Our Business Startups Act into law. While the JOBS Act affects startups in various ways, the most important provisions so far have benefitted “emerging growth companies” that are reaching the point where they are considering an initial public offering.

The CEOs of three Boulder, CO-area companies attended the ceremony. Their companies—Rally Software Development, Return Path, and Zayo Group—meet the definition of emerging growth companies.

Rally (NYSE: RALY) went public Friday with an IPO of $84 million. Rally’s stock climbed from $14 to about $18 on its opening day, giving it a $400 million market cap.

The company makes cloud-based project management tools for software developers.

Rally’s IPO was the first for a Colorado software company in years, but others could quickly follow, CEO Tim Miller said.

“There are many successful startups that are right behind us. We’re excited to be paving the ground for those folks, but there’s a wave of companies that have just as much potential,” Miller said.

Those companies will benefit from a market that seems hungry for companies like Rally that aren’t aiming for giant IPOs but promise a lot of growth, Miller said. They also will benefit from the new rules for companies with total annual gross revenue of less than $1 billion.

One of the goals of the JOBS Act is to encourage more companies to go public by making the process less costly and burdensome. Since the 1990s tech boom collapsed, the number of IPOs has dropped significantly, with IPOs in the $50 million to $150 million range becoming rare.

Executives of growing private companies have taken notice of the new landscape, according to Return Path CEO Matt Blumberg. Return Path develops e-mail delivery and intelligence software that helps users make sure messages get through and optimizes recipient response. It has about 400 employees and dual headquarters in Broomfield, CO, and New York City.

Blumberg said that executives he knows are studying the new regulations created following the passage of the JOBS Act, weighing their impact, and talking quietly about how their companies could benefit.

“It’s been a real topic of conversation this year,” he said.

More than that, the regulations have led to action. Blumberg said he knows several companies that went public in the past year and took advantage of the new rules for emerging growth companies. They would not have made the leap under the old regulations, he said. (Blumberg declined to name the companies.)

“They were on the edge, and this helped them go over,” Blumberg said.

Analysts also believe that while the number of IPOs has remained steady, there seems to be interest brewing behind the scenes.

“Though the U.S. IPO market continued to trend sideways in the first quarter, we expect a pickup in activity through 2013 given the rise in behind-the-scenes filing activity and ongoing strength in the overall equity markets,” Renaissance Capital said in its forecast for the second quarter.

In just the past four weeks, 27 companies have filed for IPOs, the largest four-week total since the summer of 2011, according to Renaissance.

Many of those companies are taking advantage of a JOBS Act provision that allows them to file draft versions of their S-1 registration statements confidentially. If companies find interest in their stock is lower than anticipated, they can withdraw without publicly damaging their image.

Rally filed confidentially, which smoothed the process, Miller said.

“That was really nice. My understanding is the vast majority of companies are doing that. As a result of being able to file confidentially, it was a pretty orderly process. There were no real surprises.”

Return Path is not planning on going public soon, Blumberg said, but its executives are expecting to make use of the new rules for emerging growth companies if and when they do.

“There are a couple of provisions we’ll take advantage of,” Blumberg said. “I do think we’ll take advantage of the confidential filing when we get there.”

The act also does away with other provisions that have deterred companies from going public, Blumberg said.

Emerging growth companies only have to file two years of audited financial records with the SEC when they begin the IPO process, instead of three. There also is a five-year “on ramp” period when companies do not have to comply with parts of the Sarbanes-Oxley Act, such as needing an auditor to attest to their internal financial controls.

Going through an IPO can cost $1 million to $2 million. Complying with provisions of Sarbanes-Oxley and other regulations typically cost between $1 million and $3 million annually, according to Blumberg.

“Adding an expense like that is a real big deal,” he said.

One year after its passage, the JOBS Act has changed how companies plan and made going public less burdensome. Still, it doesn’t change the ultimate dilemma companies have to face when they take the leap.

“It makes [going public] easier, it makes it less risky and costly, but you have to be ready to run a public company,” Blumberg said.


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