On April 5, 2012, President Obama signed into law the “Jumpstart Our Business Startups Act,” or JOBS Act. The JOBS Act is expected to reduce the barriers to smaller and start-up companies of raising capital and the burdens of complying with federal securities laws. Specifically, the JOBS Act will, among other things: (1) provide relief for “emerging growth companies;” (2) permit advertising and general solicitations for private placements that are limited to accredited investors or qualified institutional buyers; (3) create an exception from registration for “crowdfunding” offerings; (4) expand Regulation A for small private issuers; and (5) increase the shareholder thresholds triggering public reporting requirements.
Relief for “Emerging Growth Companies”
The JOBS Act creates a new category of companies known as “Emerging Growth Companies,” or an EGC. The JOBS Act defines an EGC as a company that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year, other than a company that completed its initial public offering, or IPO, on or before December 8, 2011.[1]
The JOBS Act reduces certain regulatory burdens during the IPO process by allowing EGCs to:
- “test the waters” prior to filing an IPO registration statement by soliciting indications of interest from qualified institutional buyers and institutional accredited investors, which would otherwise be prohibited by the gun-jumping rules;
- file a confidential review of its IPO registration statement with the SEC without having to publicly file until near the time of effectiveness of the registration statement, minimizing negative implications if the EGC does not complete its IPO; and
- file two years of audited financial statements, rather than three years.
In addition, the JOBS Act relaxes the restrictions on research and communications with research analysts by permitting:
- participating broker-dealers to issue research reports on the EGC during the IPO process; and
- research analysts to meet with members of the EGC’s management team during the IPO process, even if investment bankers and other representatives of the broker-dealer are present.
The JOBS Act also provides certain disclosure relief for EGCs. For up to five years after an IPO, an EGC:
- is not required to have an auditor attestation report on the EGC’s internal controls over financial reporting;
- is not required to include a “say-on-pay,” “say when on pay” or “say on golden parachute” vote in its proxy statement;
- is allowed to use scaled back executive compensation disclosure; and
- is not required to adopt the new GAAP pronouncements.
These changes were effective immediately upon the enactment of the JOBS Act.
Certain Exceptions from the Prohibition on Advertising in Private Offerings
The JOBS Act permits general solicitation and general advertising in connection with transactions effected pursuant to Rule 506 or Rule 144A under the Securities Act, provided that sales are limited to accredited investors or qualified institutional buyers. The JOBS Act requires a company to take reasonable steps to verify that purchasers of the securities are accredited investors or qualified institutional buyers.
All issuers may take advantage of this change, however, the SEC has 90 days to revise Rule 506 and Rule 144A. The current rules will remain in effect until revised, meaning that companies currently conducting private placements should not engage in any currently impermissible advertising or general solicitation in connection with these transactions.
Crowdfunding Exception
Crowdfunding is a capital-raising strategy in which a company raises capital from a pool of small investors. In order to permit companies to raise capital via crowdfunding, the JOBS Act creates an exception from registration of securities under the Securities Act that would permit companies to raise capital from large pools of small investors provided that: (i) no more than $1,000,000 is sold during a 12-month period; (ii) the aggregate amount sold to any investor is capped based upon a percentage of such investor’s net worth or yearly income; (iii) the transaction is conducted through a broker or funding portal (which such brokers and funding portals would be required to register with the SEC); and (iv) the company must comply with Section 4A(b) of the Securities Act.[2]
The JOBS Act requires the SEC to issue rules within 270 days after enactment of the act to implement the new crowdfunding provisions.
Small Public Offerings under Regulation A
The JOBS Act creates a new exemption for small public offerings of up to $50,000,000 in securities within a 12-month period before having to register such securities with the SEC, as opposed to the current exemption ceiling of $5,000,000. Non-public companies taking advantage of this reform would be required to file audited financial statements with the SEC annually and be subject to other periodic disclosure requirements. Additionally, such limited public offerings would be exempt from state securities laws when the securities are: (1) offered or sold on a national securities exchange; or (2) sold to a qualified purchaser as defined by the SEC.
The JOBS Act does not specify a date by which the SEC must adopt rules implementing this exception for limited public offerings.
Increases in Shareholder Thresholds Triggering Public Reporting Requirements
Section 12 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, currently requires companies that have more than 500 shareholders of record to register with the SEC within 120 days after the last day of its first fiscal year in which the company had total assets exceeding $10,000,000. The JOBS Act increases the shareholder threshold for SEC registration for most companies to either (i) 2,000 shareholders of record or (ii) 500 persons who are not accredited investors and for banks and bank holding companies to 2,000 shareholders of record. When calculating total shareholders of record under these revised thresholds, a company may exclude employees that received their shares in exempt offerings under employee compensation plans and investors that purchased their shares in exempt crowdfunding transactions. The threshold for banks and bank holding companies, but not other companies, to de-register and exit the SEC reporting system has also been increased by the JOBS Act to 1,200 shareholders of record. For registrants that are not banks or bank holding companies the threshold to de-register remains at 300 shareholders of record.
The increase to the threshold for the number of shareholders of record at year end triggering the requirement to register under the Exchange Act was effective upon enactment of the JOBS Act. Similarly, the increase to the number of shareholders of record below which a bank or bank holding company may de-register and exit the SEC reporting system was effective upon enactment of the JOBS Act.
On April 11, 2012, the SEC issued a set of frequently asked questions providing interpretive guidance on the changes to the registration thresholds mandated by the JOBS Act. In these FAQs, the SEC confirmed that bank holding companies with less than 1,200 shareholders of record are immediately eligible to file a Form 15 with the SEC terminating registration under Section 12(g) of the Exchange Act. The Form 15 filed should include an explanatory note indicating that the bank holding company is relying on Section 12(g)(4) of the Exchange Act to terminate its duty to file reports with the SEC. The obligation to file such reports will terminate 90 days after the filing of the Form 15, but the bank holding company must continue to file reports with the SEC during this 90-day period. Bank holding companies that have had a registration statement declared effective by the SEC during 2012 or that have updated a registration statement pursuant to Section 10(a)(3) of the Securities Act during 2012 will continue to have a reporting obligation under Section 15(d) of the Securities Act for the 2012 fiscal year. The FAQs do, however, note that bank holding companies with a class of security held by less than 1,200 persons as of the first day of fiscal 2012 that is updated pursuant to Section 10(a)(3) of the Securities Act, but under which no sales have been made during the current fiscal year, may be eligible to seek no-action relief to suspend the Section 15(d) reporting obligation.
[1] A company remains an EGC until the earliest of: (i) the last day of the fiscal year during which it had total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of a company’s IPO; (iii) the date on which a company has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) is deemed to be a “large accelerated filer” as defined by the Securities Exchange Act of 1934.
[2] A company must file with the SEC and provide to investors and the relevant broker or funding portal a description of its business and financial condition, financial statements, intended use of proceeds, and ownership and capital structure. A company can only advertise the terms of the offering through the funding portal or broker, can only compensate persons who promote the offering in a manner prescribed by the SEC and must annually file with the SEC and provide to investors financial statements in compliance with rules that the SEC may establish.