Does JOBS Act = New banks?

Over the past several months, I’ve been critical of venture capitalists who believe over-regulation has prevented some of their portfolio companies from going public. In fact, I’ve characterized the so-called “IPO crisis” as imaginary.

But that debate ended yesterday, when the U.S. Senate passed the JOBS Act. The House of Reps is expected to vote on the amended bill next week, after which President Obama will pull out one of his fanciest pens (likely with Steve Case and John Doerr looking over his shoulder). You can read my analysis of the bill by going here.

So the question now becomes: What next?

The JOBS Act certainly will reduce costs for small companies that want to go public, and that should produce a modest increase in IPO registrations. But those small issuers still will be left using the bulge-bracket banks – and paying bulge-bracket fees – due to the relative paucity of boutiques. Yes, these are success fees rather than sunk costs, but they ultimately dwarf even the most burdensome Sarbanes-Oxley expenses.

Moreover, the lack of boutiques will continue to make it difficult for emerging companies to receive pre-IPO bank analysis (and, in many cases, post-IPO bank analysis). The JOBS Act will allow investment banking analysts to offer pre-IPO research on bank clients (rolling back a key SOX provision), but anyone with a shred of sense will dismiss such reports as hopelessly conflicted.

What this says to me is that this is the time for a new generation of boutiques to emerge, perhaps with private equity backing. Both for underwriting and for research. The talent is out there. It simply needs to be aggregated, and given structure. A legitimate greenfield opportunity, albeit a retro one.

I’ve also been noodling with the idea of venture capital firms banding together to form a research boutique. Yes, it too would be conflicted, but perhaps the firms only would agree to fund it for five years after which it must fly solo (without repaying the investment). And, if every firm is a backer (pro-rated to capital under management?), then perhaps the conflicts could be mitigated. But such a proposal is likely unworkable, given that: (a) The NVCA, which is the only viable organizer, can’t do it due to its nonprofit status, (b) “Free riders” will exploit the system and (c) Later-stage firms would get more benefit than early-stage firms, thus angering LPs of the latter.

So back to private equity: Congress has given you an opportunity, even if folks like me don’t believe it needed to do so. Who will take advantage of it?

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