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JOBS Act Deconstructed: Regulatory Relief

October 1, 2013
More than 40 biotech companies have gone public using provisions made available to emerging growth companies through the JOBS Act. BIOtechNOW’s JOBS Act Deconstructed series will explore why it has had such an impact on biotech offerings and how emerging companies can leverage the new law to their best advantage.

The JOBS Act marks a key departure from the previous one-size-fits-all regulatory approach for companies conducting a public offering.  Emerging growth companies (EGCs) are now subject to a new regulatory regime, designed to relax their compliance burden as compared to larger and more complex issuers.

In a nutshell: EGCs are eligible for these regulatory allowances during their first five years on the public market, provided that they do not exceed $700 million in public float or $1 billion in revenue during that time.

Why you should care: The most important reform for biotechs is an exemption from the costly external attestation of internal financial controls mandated by Section 404(b) of the Sarbanes-Oxley Act (SOX).  Before the JOBS Act, newly-public biotechs were forced to divert capital from science to compliance for this expensive requirement.  The true value of a biotech company is found in scientific progress rather than disclosures of losses incurred during the decade-plus development timeline.  As such, investors make their decisions based on lab results and milestones in the clinic, not the statements and reports mandated by Section 404(b).  The JOBS Act reflects this reality by giving emerging innovators five years to spend time and capital on R&D rather than an onerous reporting burden.

The JOBS Act also relaxes regulatory obligations in a number of other areas, including a scaled compliance burden for executive compensation disclosures and certain financial information and exemptions from costly requirements like say-on-pay and CD&A.  EGCs are also exempt from mandatory audit firm rotation, and BIO supports legislation sponsored by Reps. Robert Hurt and Gregory Meeks (H.R. 1564, the Audit Integrity and Job Protection Act) to extend this exemption to all issuers.

Looking ahead: BIO is supporting legislation sponsored by Rep. Michael Fitzpatrick (H.R. 2629, the Fostering Innovation Act) that would extend the exemption from Section 404(b) compliance to all growing innovators on the public market, regardless of the timing of their IPO.

Bottom line: Each of these important measures provides regulatory relief to growing biotechs, allowing them to spend valuable innovation capital on breakthrough research rather than bureaucratic red tape.

The BIO Investor Forum (October 8-9, 2013 in San Francisco) will feature two panels on the public markets: an investor perspective and an in depth discussion with company management making the private to public transition. The BIO Investor Forum is the must attend event for companies setting their sights on IPO. In fact, 71 percent of the 2013 companies that have gone public have attended the conference.

This policy overview is not intended to, and does not, constitute legal counsel – issuers should consult their own legal teams before considering an offering and should not rely on this overview when considering such an offering.