The JOBS Act has changed the IPO landscape dramatically for EGCs, with a number of accommodations designed to both facilitate the process of going public and ease the burden of becoming a reporting company. These accommodations include confidential SEC review, the ability to "test the waters" with prospective investors and scaled financial and executive compensation disclosure requirements, which allow these smaller companies to access the US capital markets in a more cost-effective manner.

Possibly the most significant JOBS Act reforms are the ability of EGCs to submit IPO registration statements confidentially, which has become a nearly universal practice, and the ability to test the waters with prospective investors, which has gained momentum across all industries. Testing the waters has become particularly prevalent in certain sectors, such as biotechnology, where companies tend to have shorter operating histories, face unique funding, regulatory and clinical development challenges, and often need to communicate highly complex scientific or technical information to potential investors. In this sector, in particular, it is often critical for a company to engage with prospective investors as early as possible in the IPO process.

Together, the ability to file confidentially and to test the waters enables companies to educate, and gain useful feedback from, prospective investors while maintaining confidentiality as they await both clearance from industry regulators and market conditions that are favorable to the offering. These reforms can also facilitate dual-track IPO/M&A discussions as well.

While the ability to submit an IPO registration statement confidentially offers many benefits to EGCs, situations arise from time to time where an EGC may choose to issue a press release announcing its confidential submission. However, this practice remains infrequent, and any such press release must comply with the limitations imposed by the Securities Act on "gun-jumping."

An EGC may elect to publicly announce its confidential submission for strategic reasons, particularly if it is engaged in a dual-track IPO/M&A process. This is a process where a company pursues an IPO while simultaneously running a confidential private auction to look for interested acquirers. To create leverage in the M&A context, an EGC may seek to attract bidders by signaling to the market the potential for an IPO. The press release enables an EGC to announce the fact of a proposed IPO without having to file publicly, and therefore without prematurely revealing potentially sensitive financial or competitive information.

In addition, an EGC may be required to issue a press release announcing its confidential submission or publicly file its registration statement as a way to cleanse existing securityholders of material non-public information (MNPI). This situation may arise where existing investors are wall-crossed so that they may participate in the company's testing the waters presentations. A company can obtain valuable feedback from its existing investors as they are already familiar with the company's business and industry. In order to permit those investors to subsequently trade in the company's securities, however, a press release or public filing is required to cleanse them of any MNPI disclosed to them during the testing the waters process, which may include the fact that the company is contemplating a potential IPO.

It would be difficult to argue that the rise in the number of pharmaceuticals and biotechnology IPOs is not in some way tied to the implementation of the JOBS Act, which has lessened regulatory burdens and eased access to important public growth capital for smaller companies. In the first half of this year, companies in the healthcare sector represented more than half of all EGC IPOs we have worked on at Davis Polk, and we have seen an overall upward trend in pharmaceuticals and biotechnology EGC clients looking to the public markets since 2012, the year the JOBS Act was enacted.

In the near term, it is likely that the prominence of these sectors in the IPO market will continue. There is intense competition and innovation at work in this industry, and cost-effective access to public capital (which offers the potential for far greater returns than the private markets) is critical to support the significant costs of research and clinical development needed to bring new drugs to market. Biotechnology is becoming a more stable and mature industry, and the strong pipeline of drugs in late-stage trials should continue to drive investor interest and help sustain high-quality deal flow.

Regarding other sectors, recently we have seen an increase in retail and restaurant chain IPOs. Following several successful IPOs in this industry and in light of a gradual increase and stability associated with consumer spending in general, we expect to see more retail and restaurant chains accessing the public markets.