US banks are assessing the possible impact that the Jobs Act might have in encouraging Latin American companies that are planning an IPO to conduct a dual-listing strategy.
The legislation eases the regulatory and disclosure requirements for emerging-growth companies listing in the US. EGCs are companies with less than $1 billion in revenues and can be based abroad.
ECM bankers in New York regularly complain that local investment banks in Latin America, and particularly in Brazil, have dissuaded IPO candidates from dual listings or SEC-registered transactions because of the extra disclosure requirements. SEC-registered deals also place foreign companies under the purview of US regulators and Sarbanes-Oxley accounting requirements.
"It’s very interesting how few dual-listed companies there are in Brazil and the Jobs Act could be a catalyst for more dual listings," says Christopher Harland, chairman of Latin America at Morgan Stanley, which is one of the banks looking at the likely impact of the Jobs Act on Latin American corporates’ IPO strategies.
IPOs that include selling to US investors – particularly if retail investors are targeted – would increase the motivation of Latin American companies to mandate US banks.
Brazilian IPOs are still struggling with valuations, with only one of this year’s deals pricing within the range. Harland argues that US retail investors, which often account for up to 20% of US IPOs, would boost the demand for these deals. "Retail investors want to play the consumer story in Brazil and so I think they would be interested in banks, healthcare, education, luxury goods – any companies that expose them to discretionary consumer spending would be very relevant to retail," says Harland. "In an environment like we have today, to not have retail [investors] might be a costly decision."
According to a report by law firm Herbert Smith, the Jobs Act says that an EGC is permitted to provide two, rather than three, years of audited financial statements in its IPO prospectus, and the selected financial data and management’s discussion and analysis sections of the IPO prospectus cover only those two years.
Potentially of greater interest to foreign EGCs is that they will not be required to qualify with Sarbanes-Oxley requirements for a period of five years, which US bankers suspect has been a big disincentive to pursuing SEC-registered deals.
However, Herbert Smith suggests that the burden of disclosure might not be the main reason why few Latin American companies conduct SEC-registered IPOs: "It remains to be seen if foreign private issuers that qualify as EGCs will seek to undertake SEC-registered IPOs as a result of the Jobs Act," the law firm says. "The Jobs Act does not significantly change the landscape for liability (and potential litigation) under the US securities rules. This has historically been a major consideration for foreign private issuers when approaching the US capital markets."
Some local bankers have also argued against dual listings on the grounds that a second listing takes liquidity away from the home market. However, an ECM banker based in New York argues that this is incorrect: "I would challenge that firmly," he says. "The New York listing would be for retail. Any institutional investor is going to go to the most liquid market, which is clearly the home market, and so a secondary listing would have absolutely no impact on the trading on the Bovespa."
