Capital Access: IPO and “IPO On-Ramp”
link to page 1 
March 26, 2018
Capital Access: IPO and “IPO On-Ramp”
Raising capital through public offerings was traditionally
securities offering to prospective investors. Roadshows can
viewed as a significant step for companies to achieve
commence only after the filing of registration statements.
growth and create jobs. Its importance, however, has
Post-effective Period. The actual sales to investors take
deteriorated over the last two decades, as measured by the
place after the SEC declares that the IPO registration is
decline in the number of initial public offerings (IPOs). In
effective. The post-effective period extends from the
response to this market trend, Congress established a
effective date of the registration statements to the
number of new capital access options in 2012 through the
completion of distribution of the securities. With the
Jumpstart Our Business Startups Act (JOBS Act; P.L. 112-
completion of the IPO, the securities generally continue to
106), including the creation of a new issuer type—emerging
trade on a stock exchange.
growth company (EGC)—to scale down compliance
requirements and facilitate IPOs. Because of the rapid
Market Trends
adoption of the EGC status by companies going public,
some in Congress have proposed widening its access by
Going public was traditionally viewed as a significant
expanding the length of time an EGC could maintain its
funding source for growing companies. More recently,
status or by extending certain EGC benefits to other IPOs.
however, the number of U.S.-listed domestic public
This has been a source of policy debate.
companies has declined by half over the last two decades
(Figure 1) while listings are estimated to have risen by half
Public Offerings and the IPO Process
in other developed countries over the same time period.
Overall, the number of public companies declined due to
A public offering refers to when a company raises funds
mergers, acquisitions, and delistings (removal of securities
from the public at large rather than a narrower group of
from exchanges). In addition, part of the decrease in the
sophisticated investors. Public offerings consist of IPOs, the
number of public companies is due to the decrease in IPOs.
first time a company offers its shares of stock to the general
According to data provider Dealogic, U.S. IPOs raised
public in exchange for cash, and subsequent public
$49.3 billion through 189 offerings in 2017, more than
offerings. A company can access funding from other
double 2016’s level of $24.2 billion raised through 111
sources of capital, such as bank loans or private equity
offerings. Though the total number of IPOs increased in
firms, but it may choose to conduct public offerings—
2017, it has remained far below the IPO average of more
which require rigorous Securities and Exchange
than 500 per year in the 1990s. However, whether the
Commission (SEC) disclosure—for multiple reasons,
1990s, which experienced the dot-com bubble, is an
including fueling the company’s future growth; allowing
appropriate benchmark is a point of contention as well.
the founders to cash out their investments; providing stock
incentives to employees; and enhancing corporate brand
Figure 1. Number of U.S.-Listed Public Companies
awareness. The IPO process, which is a focal point of the
and Aggregate Market Capitalization
policy debate surrounding public offerings, is commonly
regarded as the turning point for companies “going public.”
The IPO process generally consists of three phases.
Pre-filing Period. As part of an IPO, a company must file a
registration statement and other documents that contain
information about the company and the funds it is
attempting to raise. During the pre-filing period, the public
filings are prepared and the planning begins with a
thorough review of the company’s operations, procedures,
financials, and management, as well as its competitive
positioning and business strategy. The disclosure
documents serve the dual purpose of satisfying SEC
Sources: Center for Research in Security Prices; and Kathleen M.
registration requirements and communicating with
Kahle and René M. Stulz, “Is the U.S. Public Corporation in Trouble?”
investors.
Journal of Economic Perspectives, vol. 31, no. 3, pp. 67-88.
Waiting Period. Once the key disclosures are filed, the
“IPO On-Ramp”–Emerging Growth
company waits for the SEC to review and provide approval.
Companies
During the waiting period, the company concurrently
addresses SEC comments and prepares roadshow
In response to declining IPOs over the last two decades and
presentations as well as other legal documents needed to
in an effort to reduce barriers for smaller companies
consummate the sale. Roadshows are presentations made by
accessing public offerings, Title I of the JOBS Act
an issuer’s senior management to market the upcoming
established streamlined compliance options for companies
that meet the definition of a new type of issuer, called an
https://crsreports.congress.gov
Capital Access: IPO and “IPO On-Ramp”
emerging growth company. The streamlined process
lengthening the amount of time EGCs could maintain their
available to an EGC is called “IPO On-Ramp” because it is
status or expanding certain EGC benefits to all IPO firms.
a scaled-down version of a traditional IPO. To qualify as an
Section 441 of H.R. 10 and H.R. 1645 would allow
EGC, a company must have total annual gross revenue of
companies to extend the length of time that a company
less than $1 billion during its most recently completed
could be an EGC. A company would maintain its EGC
fiscal year. EGCs maintain their status for five years after
status through the earliest occurring event of (1) 10 years
their IPO or until their gross revenue exceeds $1 billion,
after the EGC went public; (2) the end of the fiscal year in
among other conditions. Relative to a conventional IPO,
which the EGC’s average gross revenues exceed $50
EGCs have the following features:
million; or (3) when the EGC qualifies with the SEC as a
Scaled-back disclosure requirements in which they (1)
large accelerated filer ($700 million public float, which is
may use two years of financial statements certified by
the number of shares that are able to trade freely among
independent auditors, instead of three years for a
investors that are not controlled by corporate officers or
traditional IPO; and (2) are not required to provide
promoters).
compensation committee reports, among other things.
Section 499 of H.R. 10 and H.R. 3903 would allow all
An exemption from auditor attestations of internal
issuers making an IPO (1) to communicate with potential
control over financial reporting that are required by
investors before the offering (test-the-waters) and (2) to file
Section 404(b) of the Sarbanes-Oxley Act (P.L. 107-
confidential draft registration statements with the SEC.
204).
These benefits were previously available only to companies
“Test-the-waters” communications, meaning the EGCs
with EGC status. As mentioned earlier, the SEC recently
may meet with qualified institutional buyers and
expanded the EGC confidential review benefit to all
institutional accredited investors to gauge their interests
companies effective July 10, 2017. The SEC is also
in a potential offering during the registration process, an
reportedly studying a move to expand the test-the-waters
activity prohibited during a normal IPO.
benefit.
A confidential SEC review process that allows
Key Policy Issues
companies to submit draft registration statements to the
SEC for a confidential preliminary review for agency
Proposals to facilitate IPOs by providing regulatory relief
input.
often involve two potentially conflicting core SEC statutory
missions: (1) fostering investor protection largely through
Although the reduced compliance requirements more
mandatory disclosure; and (2) facilitating capital formation.
obviously generate cost savings for all EGC status holders,
Proposals that reduce the registration and disclosures that a
the confidential review and test-the-waters features are
company must make can decrease the company’s
especially valuable for companies in industries where a
compliance costs and increase the speed and efficiency of
company’s valuation is uncertain and the timing of the IPO
capital formation, but the reduced disclosures may expose a
depends on regulatory or other approval (e.g.,
company’s investors to additional risks if they are not
biotechnology). The ability to have confidential SEC
receiving information that is important to informed
review and conduct test-the-waters communications with
investment decisionmaking.
prospective investors provides additional flexibility for
companies considering IPOs.
Proponents of expanding the JOBS Act’s EGC-based
regulatory relief argue that the measures have benefited
A biotechnology EGC testified during a recent
capital formation without sacrificing investor protection.
congressional hearing that 212 emerging biotech companies
They also assert that many private companies are reluctant
went public under EGC status as of March 2017, relative to
to go public due to regulatory impediments and thus could
55 biotech IPOs in the five years leading up to the JOBS
benefit from further regulatory relief.
Act. This may indicate that taking advantage of EGC status
potentially enhances biotech capital access.
In addition to investor protection concerns about disclosure,
critics point to the lighter regulatory standards under EGC
The EGC provision is a widely adopted part of the JOBS
that currently dominate the IPO process. They believe the
Act. Around 87% of the firms that filed for an IPO after
EGC regime appears to have enabled many relatively
April 2012 were EGCs at the time of filing, leaving 13% of
financially weak companies to conduct IPOs. The EGC
IPOs still going through the conventional process. Most
firms are also said to have experienced underpricing
EGCs availed themselves of the confidential review and the
relative to comparable firms. Underpricing refers to IPOs
reduced submission requirements for audited financial
that are issued at below market value, leaving less money to
reports.
fund company growth.
The SEC expanded the option of confidential review to all
For more on capital access, see CRS In Focus IF10848,
companies effective on July 10, 2017, to allow non-EGC
Capital Access: SEC Regulation A+ (“Mini-IPO”), by Eva
companies to benefit from the process. Most companies
Su.
now use the SEC confidential review to incorporate
feedback prior to public disclosure and announcement.
Eva Su, Analyst in Financial Economics
Legislative Proposals
IF10855
Following the EGC regime’s rapid ramp-up, there are new
legislative proposals to expand IPO On-Ramp by either
https://crsreports.congress.gov
Capital Access: IPO and “IPO On-Ramp”
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10855 · VERSION 2 · NEW
March 26, 2018
Capital Access: IPO and “IPO On-Ramp”
Raising capital through public offerings was traditionally
securities offering to prospective investors. Roadshows can
viewed as a significant step for companies to achieve
commence only after the filing of registration statements.
growth and create jobs. Its importance, however, has
Post-effective Period. The actual sales to investors take
deteriorated over the last two decades, as measured by the
place after the SEC declares that the IPO registration is
decline in the number of initial public offerings (IPOs). In
effective. The post-effective period extends from the
response to this market trend, Congress established a
effective date of the registration statements to the
number of new capital access options in 2012 through the
completion of distribution of the securities. With the
Jumpstart Our Business Startups Act (JOBS Act; P.L. 112-
completion of the IPO, the securities generally continue to
106), including the creation of a new issuer type—emerging
trade on a stock exchange.
growth company (EGC)—to scale down compliance
requirements and facilitate IPOs. Because of the rapid
Market Trends
adoption of the EGC status by companies going public,
some in Congress have proposed widening its access by
Going public was traditionally viewed as a significant
expanding the length of time an EGC could maintain its
funding source for growing companies. More recently,
status or by extending certain EGC benefits to other IPOs.
however, the number of U.S.-listed domestic public
This has been a source of policy debate.
companies has declined by half over the last two decades
(Figure 1) while listings are estimated to have risen by half
Public Offerings and the IPO Process
in other developed countries over the same time period.
Overall, the number of public companies declined due to
A public offering refers to when a company raises funds
mergers, acquisitions, and delistings (removal of securities
from the public at large rather than a narrower group of
from exchanges). In addition, part of the decrease in the
sophisticated investors. Public offerings consist of IPOs, the
number of public companies is due to the decrease in IPOs.
first time a company offers its shares of stock to the general
According to data provider Dealogic, U.S. IPOs raised
public in exchange for cash, and subsequent public
$49.3 billion through 189 offerings in 2017, more than
offerings. A company can access funding from other
double 2016’s level of $24.2 billion raised through 111
sources of capital, such as bank loans or private equity
offerings. Though the total number of IPOs increased in
firms, but it may choose to conduct public offerings—
2017, it has remained far below the IPO average of more
which require rigorous Securities and Exchange
than 500 per year in the 1990s. However, whether the
Commission (SEC) disclosure—for multiple reasons,
1990s, which experienced the dot-com bubble, is an
including fueling the company’s future growth; allowing
appropriate benchmark is a point of contention as well.
the founders to cash out their investments; providing stock
incentives to employees; and enhancing corporate brand
Figure 1. Number of U.S.-Listed Public Companies
awareness. The IPO process, which is a focal point of the
and Aggregate Market Capitalization
policy debate surrounding public offerings, is commonly
regarded as the turning point for companies “going public.”
The IPO process generally consists of three phases.
Pre-filing Period. As part of an IPO, a company must file a
registration statement and other documents that contain
information about the company and the funds it is
attempting to raise. During the pre-filing period, the public
filings are prepared and the planning begins with a
thorough review of the company’s operations, procedures,
financials, and management, as well as its competitive
positioning and business strategy. The disclosure
documents serve the dual purpose of satisfying SEC
Sources: Center for Research in Security Prices; and Kathleen M.
registration requirements and communicating with
Kahle and René M. Stulz, “Is the U.S. Public Corporation in Trouble?”
investors.
Journal of Economic Perspectives, vol. 31, no. 3, pp. 67-88.
Waiting Period. Once the key disclosures are filed, the
“IPO On-Ramp”–Emerging Growth
company waits for the SEC to review and provide approval.
Companies
During the waiting period, the company concurrently
addresses SEC comments and prepares roadshow
In response to declining IPOs over the last two decades and
presentations as well as other legal documents needed to
in an effort to reduce barriers for smaller companies
consummate the sale. Roadshows are presentations made by
accessing public offerings, Title I of the JOBS Act
an issuer’s senior management to market the upcoming
established streamlined compliance options for companies
that meet the definition of a new type of issuer, called an
https://crsreports.congress.gov
Capital Access: IPO and “IPO On-Ramp”
emerging growth company. The streamlined process
lengthening the amount of time EGCs could maintain their
available to an EGC is called “IPO On-Ramp” because it is
status or expanding certain EGC benefits to all IPO firms.
a scaled-down version of a traditional IPO. To qualify as an
Section 441 of H.R. 10 and H.R. 1645 would allow
EGC, a company must have total annual gross revenue of
companies to extend the length of time that a company
less than $1 billion during its most recently completed
could be an EGC. A company would maintain its EGC
fiscal year. EGCs maintain their status for five years after
status through the earliest occurring event of (1) 10 years
their IPO or until their gross revenue exceeds $1 billion,
after the EGC went public; (2) the end of the fiscal year in
among other conditions. Relative to a conventional IPO,
which the EGC’s average gross revenues exceed $50
EGCs have the following features:
million; or (3) when the EGC qualifies with the SEC as a
Scaled-back disclosure requirements in which they (1)
large accelerated filer ($700 million public float, which is
may use two years of financial statements certified by
the number of shares that are able to trade freely among
independent auditors, instead of three years for a
investors that are not controlled by corporate officers or
traditional IPO; and (2) are not required to provide
promoters).
compensation committee reports, among other things.
Section 499 of H.R. 10 and H.R. 3903 would allow all
An exemption from auditor attestations of internal
issuers making an IPO (1) to communicate with potential
control over financial reporting that are required by
investors before the offering (test-the-waters) and (2) to file
Section 404(b) of the Sarbanes-Oxley Act (P.L. 107-
confidential draft registration statements with the SEC.
204).
These benefits were previously available only to companies
“Test-the-waters” communications, meaning the EGCs
with EGC status. As mentioned earlier, the SEC recently
may meet with qualified institutional buyers and
expanded the EGC confidential review benefit to all
institutional accredited investors to gauge their interests
companies effective July 10, 2017. The SEC is also
in a potential offering during the registration process, an
reportedly studying a move to expand the test-the-waters
activity prohibited during a normal IPO.
benefit.
A confidential SEC review process that allows
Key Policy Issues
companies to submit draft registration statements to the
SEC for a confidential preliminary review for agency
Proposals to facilitate IPOs by providing regulatory relief
input.
often involve two potentially conflicting core SEC statutory
missions: (1) fostering investor protection largely through
Although the reduced compliance requirements more
mandatory disclosure; and (2) facilitating capital formation.
obviously generate cost savings for all EGC status holders,
Proposals that reduce the registration and disclosures that a
the confidential review and test-the-waters features are
company must make can decrease the company’s
especially valuable for companies in industries where a
compliance costs and increase the speed and efficiency of
company’s valuation is uncertain and the timing of the IPO
capital formation, but the reduced disclosures may expose a
depends on regulatory or other approval (e.g.,
company’s investors to additional risks if they are not
biotechnology). The ability to have confidential SEC
receiving information that is important to informed
review and conduct test-the-waters communications with
investment decisionmaking.
prospective investors provides additional flexibility for
companies considering IPOs.
Proponents of expanding the JOBS Act’s EGC-based
regulatory relief argue that the measures have benefited
A biotechnology EGC testified during a recent
capital formation without sacrificing investor protection.
congressional hearing that 212 emerging biotech companies
They also assert that many private companies are reluctant
went public under EGC status as of March 2017, relative to
to go public due to regulatory impediments and thus could
55 biotech IPOs in the five years leading up to the JOBS
benefit from further regulatory relief.
Act. This may indicate that taking advantage of EGC status
potentially enhances biotech capital access.
In addition to investor protection concerns about disclosure,
critics point to the lighter regulatory standards under EGC
The EGC provision is a widely adopted part of the JOBS
that currently dominate the IPO process. They believe the
Act. Around 87% of the firms that filed for an IPO after
EGC regime appears to have enabled many relatively
April 2012 were EGCs at the time of filing, leaving 13% of
financially weak companies to conduct IPOs. The EGC
IPOs still going through the conventional process. Most
firms are also said to have experienced underpricing
EGCs availed themselves of the confidential review and the
relative to comparable firms. Underpricing refers to IPOs
reduced submission requirements for audited financial
that are issued at below market value, leaving less money to
reports.
fund company growth.
The SEC expanded the option of confidential review to all
For more on capital access, see CRS In Focus IF10848,
companies effective on July 10, 2017, to allow non-EGC
Capital Access: SEC Regulation A+ (“Mini-IPO”), by Eva
companies to benefit from the process. Most companies
Su.
now use the SEC confidential review to incorporate
feedback prior to public disclosure and announcement.
Eva Su, Analyst in Financial Economics
Legislative Proposals
IF10855
Following the EGC regime’s rapid ramp-up, there are new
legislative proposals to expand IPO On-Ramp by either
https://crsreports.congress.gov
Capital Access: IPO and “IPO On-Ramp”
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10855 · VERSION 2 · NEW