Emerging Growth Companies' Performance Under the JOBS Act
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Date
2018-05
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The Ohio State University
Abstract
The number of public companies in the U.S. has steadily declined over the past two decades. To help reverse this trend and encourage small businesses to go public and receive funding, the U.S. passed the Jumpstart Our Business Startups Act, or JOBS Act, in 2012. This law helped small U.S. businesses go public by relaxing many of the typical securities regulations a public company would normally face. The part of the law that has gained the most attention is Title III, the CROWDFUND Act. This part of the law allows companies, called emerging growth companies, to use crowdfunding to issue securities, which was not allowed previously. This meant that non-accredited, or retail investors, could now invest in these IPOs. Because these emerging growth companies don't disseminate as much information about themselves as one would see from a typical public company, it makes it more difficult for investors to determine if an emerging growth company is a successful investment. This additional accessibility to retail investors combined with the relaxed reporting requirements led me to investigate whether or not investing in emerging growth companies would result in subpar relative returns. This study examines stock returns and volatility measures for emerging growth companies that have gone public since the passing of Title III of the JOBS Act and finds that these companies have had poor relative returns. When looking at the returns for these emerging growth companies, the 50th percentile and median of returns is -0.7%, far below the 50th percentile and median of the S&P 500 and other comparable indices. Preliminary results have also shown these emerging growth companies to be more volatile than most other stocks, meaning losses can happen quickly. Because these companies have shown to be poor and risky investments thus far while being able to take advantage of uninformed retail investors, actions must be taken to increase the reporting requirements for emerging growth companies.
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Finance, stocks, volatility, returns