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Smoother IPO Sailing Ahead–The SEC expands the Jobs Act’s ‘testing the waters’ provision.

Smoother IPO Sailing Ahead–The SEC expands the Jobs Act’s ‘testing the waters’ provision.

Entertainment giant Endeavor on Thursday called off its initial public offering after spinning startup Peloton floundered in its Nasdaq debut and WeWork hit the rocks. The good news is that the Securities and Exchange Commission is trying to make IPO markets less turbulent by letting more private companies first “test the waters.”

The SEC voted unanimously Thursday to extend a provision of the 2012 Jobs Act that currently allows “emerging growth companies” with less than $1 billion in annual revenue to feel out institutional investors about potential public offerings before filing registration statements. Startups can thus gauge market interest and tailor their offerings based on demand.

Testing the waters can cut the costs of going public by reducing the risk of disclosing financially sensitive information. Companies can make changes in response to investors so that share prices don’t plunge upon their debut. Those that decide not to proceed with IPOs also don’t get publicly scalded.

SEC staff estimate about 37% of emerging growth companies took advantage of the Jobs Act provision between 2012 and 2018. Startups in biotech and pharmaceuticals that face higher risks of disclosing proprietary information and more uncertainty about potential investor demand were more likely to test the waters.

The SEC will now allow all companies regardless of size to do so, which the agency says will increase the likelihood of successful offerings. This is another piece of Chairman Jay Clayton’s agenda to ease regulation that needlessly increases the costs of going public and prevents mom-and-pop investors from sharing in the early growth of startups. This is another example of a smart Donald Trump appointment to run a regulatory agency that is paying off in better policy.

Uber and Pinterest waited nearly a decade after launching before going public this year. Venture capitalists who seeded the Silicon Valley startups have reaped large financial gains from their astronomical growth in their early years, but returns will be lower for retail investors. Encouraging more startups to go public earlier will spread the potential gains in wealth to a larger population and give more Americans a stake in capitalist innovation.

Earlier IPOs could also oblige private companies to clean up their management and balance sheets so they don’t imperil a public offering. Liberals who grouse about weak corporate governance in the U.S. should note that pressure from potential investors prompted WeWork this week to dump idiosyncratic Adam Neumann as CEO, dilute his voting shares and oust many of his lieutenants. Markets can be a powerful enforcer as well as a wealth creator.

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Harvey Yan

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