Practical Implications for JOBs Act IPO Filers

It has been over a year since the Jumpstart Our Business Startups Act, or JOBS Act, was unveiled on April 5, 2012, but companies and advisors engaged in the IPO process are still learning about the practical implications for emerging growth company (EGC) issuers.

Some of the most significant changes to the IPO process included:

• Issuers were allowed to make confidential filings of S-1 documents

• Accounting and disclosure requirements were reduced

• Issuers were given the ability to meet with qualified institutional investors prior to the IPO

• Sell-side analysts were allowed to publish research reports during the marketing of the IPO

From our point of view, JOBS Act filers have a real advantage in being able to establish and build investor relationships and interest with the institutions they would like to see as shareholders before filing. Ideally, for those targeted institutions, the IPO roadshow visit should be the second or third face to face visit by management. Through this “testing the waters” process, EGC issuers gain the opportunity to fine tune their investment messages and determine the key questions to be prepared for on the road. It’s important to remember that this process isn’t just all about price discovery. In our experience, investors appreciate the opportunity to get to know a company in advance of participating in an IPO because it allows them ample time to conduct due diligence, channel checks and other analysis before making a buying decision.

We checked in with Heather Rowe, Associate Director, Investor Relations of KYTHERA Biopharmaceuticals (NASDAQ: KYTH) to get an inside look at the IPO process under the JOBS Act and she shared some valuable advice for companies getting ready for a public debut. KYTHERA completed a very successful IPO in October 2012 with J.P. Morgan, Goldman Sachs, Leerink Swann and Lazard Capital Markets as underwriters. The deal priced at the high end of the range, was upsized 10% and has traded up since pricing day.

Why did KYTHERA pursue a Jobs Act filing?

As far as we know, we were the first company in the life sciences sector and the second company overall to take advantage of JOBS Act. Under provisions in the Act, emerging growth companies, or EGCs (defined as companies with total revenue of less than $1 billion during the most recent fiscal year), are allowed reduced accounting (for example, two years of audited financial statements versus three years) and disclosure requirements. Furthermore, EGCs are allowed to keep their filings confidential until they are ready to market the shares to potential investors. Although available to us, we decided not to take advantage of reduced reporting and disclosure requirements because we wanted to provide the most and best information possible to investors.

Specifically how did you capitalize on the Jobs Act filing? What did it enable you to do as compared to a traditional filing?

In addition to the provisions above, the JOBS Act allowed us to engage in what are called “test the waters” meetings to gauge interest from qualified institutional buyers (QIBs), or institutional accredited investors.

What kind of investor marketing did you do ahead of your IPO? How far in advance? How many investors did you meet with?

We undertook close to 40 “test the waters” meetings in five cities after our S-1 filing was made public and a few months before the IPO roadshow. We covered a lot of distance and were able to meet with a fair number of investors. Beyond the obvious benefit of getting to dip our toes in to generate and then gauge investor interest, these “test the waters” meetings also allowed us to test our team, test our presentation and test our messages in an interactive forum before we dove into the full-blown traditional IPO roadshow.

How did these investor meetings help with the ultimate success of your IPO?

The “test the waters” meetings were incredibly helpful for several reasons. First, they increased both the length and quality of the meetings. We were able to take extra time (sometimes 45- to 60-minute meetings) compared to the compressed schedule of an IPO roadshow where the meetings are typically only 30 minutes. Second, we were able to meet with many of the same investors on more than one occasion. This gave them at least a baseline familiarity with the company and allowed them time to conduct diligence before the IPO roadshow. In addition, beyond having the added meeting touch points, the “test the waters” meetings also helped us hone our roadshow presentation. For example, we could pinpoint questions that regularly popped up and were then able to adjust our presentation accordingly so that we proactively addressed these topics upfront instead of reacting to a question.

As you know, credibility is paramount. It is developed over time and is achieved when a company says what it will do and then does it. When on the IPO roadshow, we met with many investors we had previously seen in the “test the waters” meetings. Beyond allowing us to further build the relationship, we were also able to make use of our prior meetings in a very tangible and tactical way. For example, in addition to enabling us to provide further clarity and context on points that might have been previously misunderstood, we could also point to achievements we had made during the time since the last meeting.

All around, the “test the waters” meetings were incredibly beneficial to us.

Can you talk about the role that the analysts played in the IPO? Did they take advantage of the opportunity the JOBS Act affords them to publish research before or during your IPO?

We were in close contact with our analysts throughout the process. In our case, our analysts published reports about a month after the closing of our IPO.

Did you sense that institutional investors had any concerns about the more limited disclosure that JOBS Act companies provide? Or the lack of auditor attestation regarding the quality of internal controls?

We didn’t get any feedback that indicated institutional investors had concerns.
Would you encourage other companies to go public via a JOBS Act filing? Is there any downside to it?
Of course each company is different and what works for one might not work for another. With that said, though, we were very pleased with our decision to file under the JOBS Act.

Thanks to Heather Rowe of KYTHERA Biopharmaceuticals for sharing this great insight.