When President Obama signed the JOBS Act into law on April 5, 2012, a new category of securities issuers called emerging growth companies (EGC) was created. Qualifying as and EGC provides a company with several advantages, one being that an EGC has permission to submit a draft registration statement with the Securities and Exchange Commission confidentially. This means that the negotiation between the SEC and EGC takes place out of the public eye. Another advantage has been that an EGC is only required to provide two years of audited financial statements as opposed to the three. In addition to this, the new rules only call for unaudited financial data to go back two years instead of five. Also, the requirements for disclosure on information regarding executive compensation is not as stringent and the companies are given the choice of taking a five-year opt out of compliance with the Sarbanes-Oxley rules.
The confidentiality of these registrations enables companies to use test-the-waters communications with potential qualified institutional buyers and institutional accredited investors without making them public and therefore alerting potential competitors. All of these advantages increase the flexibility of EGCs and reduces the regulatory burdens previously placed on public-bound companies, therefore easing their access to capital. In the first half of 2014, the U.S. exchanges have seen the strongest activity for that time period in over a decade, as well as a 71% increase in deals and 50% increase in capital raised. While all of this activity cannot be credited to EGCs, since the signing of the JOBS Act, 84% of all initial public offerings (IPOs) have involved EGCs.
This, in congruence with other regulatory changes brought about by the JOBS Act including Title II (general solicitation) and the anticipated implementation of Title III (retail equity crowdfunding), has contributed to the transformation of the traditional financial market. Technological and communication advancements in the industry are also supporting the growth of alternative assets. As marketplace lending (peer-to-peer, peer-to-business, peer-to-real estate) is increasingly seen as a viable form of investment, we are seeing some of these platforms announcing their own IPOs.
Lending Club, surpassing $5 billion in loan originations in June of this year, is the biggest provider in the U.S. of marketplace lending loans. It became the first of these platforms to file for an initial public offering at the end of August. With a $4 billion valuation in a previous fundraising earlier this year, the company announced that their initial target would be $500 million although it is likely that figure will change. Following suit, OnDeck Capital, an originator of over $1.7 billion in small business loans, recently filed on November 10 with the SEC to raise up to $150 million in an initial public offering. Both of these companies plan to list on the New York Stock Exchange. It has also been reported that SoFi, a platform specializing in student loan refinancing as well as home mortgages with over $1 billion in originations, has an IPO scheduled for the beginning of 2015 with the hopes of raising $200 to $250 million.
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