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JOBS Act Deconstructed: Testing-the-Waters

October 14, 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 enables companies to promote themselves to potential investors in advance of their IPO. Prior to the JOBS Act, companies conducting a public offering could only meet with investors during a series of half hour meetings in the ten days leading up to their IPO.  This process, known as a roadshow, is designed to get company executives in front of as many potential investors as possible in a short period of time.  However, for an industry like biotechnology, a single half hour meeting is not nearly enough to explain the complicated science behind a drug candidate and explore the stories of the patients looking for answers.

In a nutshell: The JOBS Act allows emerging growth companies (EGCs) to conduct testing-the-waters meetings with investors prior to their roadshow.  These meetings enable growing companies to get relevant information, including a fuller description of their research, to potential investors in order to generate interest in an offering.  Companies can also use their interactions with investors in testing-the-waters meetings to gauge investor interest in the forthcoming IPO.

Why you should care: Because these meetings take place well in advance of an offering, potential investors have sufficient time to conduct research on a company – something particularly important for those considering investments in companies conducting groundbreaking, but complex, research.  The time in between an initial testing-the-waters meeting and the final meeting during the roadshow allows for communication and clarification between investors and issuers, a key factor in the success of biotech offerings.  An understanding of the unique biotech business model, and the promise that its science holds, takes time to develop.  The testing-the-waters process is designed to give investors that time.

Don't just take our word for it: Ken Moch, former President and CEO of Chimerix, a biotech EGC that conducted an offering in April, reported on the success of testing-the-waters during his congressional testimony this summer:
“The practical impact of these meetings was that the investors were able to do their homework on both Chimerix and their own portfolio in the time between our testing the waters meeting and the actual IPO.  This flexibility allowed them to gather the information necessary to make an investment in our company.  In addition, these face-to-face meetings provided our managers and directors with important strategic information regarding how investors viewed our business and prospects that informed decision-making with respect to not only the offering but our business in general.”

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.