“The Value Proposition of the JOBS Act and Reg A” How Will Capital Market Structures Assess Valuation for Smaller Medical Technology Companies After the JOBS Act?

There has been much debate of how the capital market landscape is looking to shape up for bioscience companies with the impending implementation of the JOBS Act.  However, even greater debate rages as to what the landscape will look like after the provisions are put into effect.

One thing is for sure, it is still unclear as to what effect the JOBS Act will truly have on the capital markets landscape, especially for industries with notorious cash burn and a constant need for capital such as biotech.  Although structures and regulations have been developed since the passing of the JOBS Act last April some claim it is still not clear how this will necessarily translate into a successful transformation of the American capital markets landscape.

At the OneMedForum conference in New York on June 27th Granville A Ungerleider, Managing Director of Whitemarsh Capital LLC and NSIP LLC commented on the notion that structures have not properly addressed the idea that multiple investors in crowdfunding will be one of the problems for private companies looking to go public in the future.

“A lot of shareholders early on equal a lot of problems.” Ungerleider explained.  “More sophisticated investors may have a problem later on, especially with question of valuations and capital structuring.”

Ungerleider also spoke about the comparative lack of resources given to research coverage and due diligence for smaller companies, saying that “more is needed; not only is there more work for external professionals but the lack of qualified people in the field hurts its competitiveness”.

Echoing these concerns is DJ Paul, Chief Strategy Officer with Gate Technologies.  Mr. Paul says that the opportunities for market structures in the private transaction markets are both significant and sizable.  “The market for private transactions is estimated to be valued at over $1 trillion dollars.” according to Mr. Paul.  “It is simply too big to be ignored.”

What This Means for Biotechnology and for the JOBS Act and Reg A

For capital-intensive enterprises that do not turn a profit for quite some time such as the biotechnology and technology sectors, the Reg A and JOBS Act provisions allow flexibility in private transactions that some are not waiting to take advantage of, creating a double-edged sword that provides both potential opportunity and calamity.  “Smaller companies in bioscience are currently using Reg A but overall, companies using Reg A exist in very isolated pockets.” observed Paul Getty, President of Satwik Ventures.

Ryan Starkes, Life Science Practices Leader at BDO, commented on the impact that the JOBS Act has already had on the biotechnology sector, in particular as being an example of the Act’s effectiveness and its ability to capitalize on timeline and initiative.

“We have already seen over a dozen biotechnology companies go public this year, which is the sector’s best start since the recession.  Reg A is particularly helpful because companies who are looking to complete an offering under the new extensions in this exemption would not have to immediately comply with the Exchange Act reporting requirements and can devote resources to other important strategic initiatives such as their R&D pipeline.”

Starkes also mentioned in BDO’s IPO Halftime Report surveyed capital market executives and found that over 50 percent expect to see an increase in biotechnology IPOs through the remainder of 2013. He also alluded to the additional benefit of Reg A allowing for IPOs to be undertaken by companies earlier in their development cycle.

Getty also spoke about how social media is not only driving the development of solutions and platforms to serve both businesses and investors but also how transparency will deliver value and liquidity.  “When you talk about the long- term potential for investor liquidity, anything that can deliver transparency that adds to value is very important.  However this has to be balanced with what companies do and what companies say.” referring to social media’s fast-growing role in corporate communications and investor relations.

What the future holds?

Ungerleider mentioned that the lifting on general solicitation combined with a strong broker/dealer network is what will make Reg A truly work.  “If I were to bring a type of investment to market, like a private REIT or an income fund for example I would strongly recommend using Reg A because of the existing financial advisory distribution channels”

Others, such as Gate Technologies’ Paul argue that other factors will be just as important, such as the establishment of secondary market structures that will trade crowdfunded securities or other types of private securities.  “I do think down the line that a secondary market will be established, where thinly traded securities will trade at a high margin, similar to private placements.”

Whatever the case may be the future for smaller biotech companies seeking capital, there will be new ways of going about it, rife with both pros and cons.  As long as structures can develop around the market effectively then the JOBS Act and Reg A should be found to be very useful.


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