President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) on April 5, 2012. It is a bipartisan legislative effort to help create jobs by easing some of the securities law requirements for raising capital. The JOBS Act, among other things:
- creates certain exemptions to facilitate initial public offerings and public reporting by issuers with less than $1 billion of total annual gross revenues.
- relaxes the rules restricting publicity in connection with certain private offerings.
- increases the size of an exemption for certain public unregistered offerings (now provided by Regulation A) from $5 million to $50 million.
- creates a small offering exemption for crowdfunding.
- increases the number of shareholders that trigger a private company's obligation to register and file reports under the Securities Exchange Act of 1934.
Many of the provisions of the JOBS Act are effective immediately. Others require rulemaking by the Securities and Exchange Commission (the “SEC”). Relaxed Requirements for Emerging Growth Companies
The JOBS Act creates a new class of issuer called an “emerging growth company” (“EGC”). To qualify as an EGC, an issuer must have total annual gross revenues of less than $1 billion and cannot have sold any common equity securities pursuant to a registration statement prior to December 8, 2011. An issuer will remain an EGC until the earliest of (i) the last day of the fiscal year during which the issuer has total annual gross revenues in excess of $1 billion; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933 (the “Securities Act”); (iii) the date on which the issuer has, during the prior three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which the issuer is deemed to be a large accelerated filer under the Securities Exchange Act of 1934 (the "Exchange Act").
EGCs will benefit from the following relief in the initial public offering process:
- Testing the waters communications. An EGC may have oral and written communications with potential investors that are qualified institutional buyers under Rule 144A and institutions that are accredited investors under Regulation D to determine investor interest in a contemplated securities offering.
- Confidential filing of registration statement. An EGC may file the registration statement for its initial public offering on a confidential basis, provided that the initial registration statement and all amendments are filed on a public basis at least 21 days before the commencement of a road show.
- Reduced audited financial statement requirements. An EGC only needs to provide two years (instead of three) of audited financial statements in its registration statement for an initial public offering. Selected financial data is not required for earlier periods.
- Securities analyst communications. The JOBS Act precludes the Securities and Exchange Commission and any national securities association from restricting employees of a broker, dealer, or member of a national securities association from arranging communications between securities analysts and potential investors in the initial public offering of an EGC. It also precludes them from restricting a securities analyst from participating in communications with management that are attended by non-analyst employees of a broker, dealer, or member of a national securities association.
After its IPO, an EGC will benefit from the following:
- No requirement for SOX 404 audit report. An EGC will not be required to file an auditor’s report with its Form 10-K attesting to the effectiveness of the company’s internal control over financial reporting (management must still provide its assessment of internal control over financial reporting).
- Reduced executive compensation disclosure. An EGC can provide the same reduced executive compensation disclosure that Item 402 of Regulation S-K allows “smaller reporting companies” to provide.
- No requirement for certain compensation-related advisory voting. An EGC is exempt from the say-on-pay, say-on-frequency, and say-on-golden parachute advisory vote requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- No requirement to comply with new accounting standards. An EGC will not be required to comply with any new or revised financial accounting standard unless and until the standard becomes applicable to companies that are non-reporting companies.
- Exemption from certain PCAOB requirements. An EGC will be exempt from any rules of the PCAOB requiring mandatory audit firm rotation or requiring a supplement to an audit report providing additional information about an audit. An EGC will also be exempt from any future PCAOB rules applying to audits unless the SEC determines that they are necessary or appropriate in the public interest.
- Research reports. A broker or dealer is able to publish a research report about an EGC that is the subject of a proposed equity offering (including both an initial and subsequent offerings), even if the broker or dealer participates in the offering.
These reduced requirements for initial public offerings and post-offering reporting by an EGC became effective immediately upon enactment of the JOBS Act. Repeal of the Ban on General Solicitation and Advertising in Certain Private Offerings
The JOBS Act requires the SEC to revise Rule 506 of Regulation D to repeal the ban on general solicitation and advertising in connection with a Rule 506 offering, provided that all purchasers of securities are accredited investors. The JOBS Act also requires the SEC to revise Rule 144A to eliminate the restriction on general solicitation and advertising in Rule 144A offerings provided that sales pursuant to this exemption are made only to qualified institutional buyers.
The SEC is required to have final rules in place for these changes by July 4, 2012. Crowdfunding
Private companies will be permitted to raise capital through an exempt crowdfunding offering in small individual amounts using brokers or funding portals. The aggregate amount which may be sold by an issuer using the crowdfunding exemption in any 12 month period cannot exceed $1 million. There are also limits on the aggregate amount which may be sold to an individual investor in any 12-month period. In the case of an investor with a net worth or annual income of less than $100,000, the limit is the greater of $2,000 or five percent of the investor's net worth or annual income. In the case of an investor with a net worth or annual income of more than $100,000, the limit is ten percent of the investor’s net worth, but no more than a maximum amount of $100,000.
This crowdfunding exemption is not available to Exchange Act reporting issuers, foreign issuers, investment companies, or to other categories of issuers the SEC determines to exclude.
The offering must be conducted through a broker or a funding portal (an intermediary created for crowdfunding, as defined in the JOBS Act). Issuers and intermediaries must comply with other requirements relating to disclosure and the offering process.
An issuer who sells securities pursuant to the crowdfunding exemption must file certain information with the SEC, provide that information to the broker or the funding portal, and make that information available to potential investors. That information includes
- the name, legal status, physical address and website of the issuer.
- the names of directors and officers and each person owning more than 20 percent of the shares of the issuer.
- a description of the financial condition of the issuer.
- a description of the stated purpose and intended use of the proceeds of the offering.
- the target offering amount, the deadline to reach that amount, and regular updates regarding the progress of the issuer in reaching that amount.
- the price to the public of the securities or the method for determining the price.
After the offering, the issuer will be required to file annually with the SEC and provide to investors reports of the results of operations and financial statements of the issuer. Securities purchased in connection with the crowdfunding exemption may not be transferred during the one-year period beginning on the date of purchase except to the issuer or an accredited investor. Sales of securities pursuant to the crowdfunding exemption will not be subject to state law registration. However, states will have jurisdiction with respect to fraud or deceit in connection with a crowdfunding exemption
The implementation of the crowdfunding exemption will require rulemaking by the SEC. The JOBS Act requires final rules for the exemption to be in place by the end of this year. Exemption for Public $50 Million Offerings
The JOBS Act creates a new class of exempt securities under Section 3(b) of the Securities Act, the statutory basis for current Regulation A. It requires the SEC to adopt a rule to implement this exemption for publicly offered securities on the following terms:
- the securities may be equity securities, debt securities (including debt securities exchangeable or convertible into equity securities), and guarantees.
- the aggregate offering amount of all securities offered and sold within any 12-month period cannot exceed $50 million.
- the securities may be sold publicly without registration and will not be restricted securities.
- the issuer must file an offering statement with the SEC which includes audited financial statements, a description of its business, its financial condition, its corporate governance principles, its use of investor funds, and other items to be determined by the SEC.
- the SEC may require the issuer to file periodic reports.
- the securities will be exempt from state blue sky laws if offered and sold on a national securities exchange or if offered or sold to a qualified purchaser as defined by the SEC.
The JOBS Act does not contain a deadline for the SEC to implement this exemption. Increase of Shareholder Threshold for Public Company Reporting
The JOBS Act amends section 12(g)(1)(A) of the Exchange Act to increase the threshold number of record holders required to trigger registration under the Exchange Act from 500 record holders to 2,000 record holders or 500 record holders who are not accredited investors. The number of record holders of a class of equity securities will not include securities held by a person who received the securities pursuant to an employee compensation plan in transactions exempt from registration under the Securities Act.
While the reduced thresholds are effective immediately, the SEC will need to implement the exclusion for record holders of securities issued under an employee benefit plan. The JOBS Act does not contain a deadline for that rulemaking.