In the beginning of April, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act’s stated purpose is to increase job creation and economic growth by improving access to public capital markets for emerging growth companies. The JOBS Act relaxes the disclosure requirements for certain companies going public, provides alternative ways for private companies to raise capital, and is intended to reduce the costs of operating as a public company.
This SEC Alert gives a snapshot of the key provisions of this new law.
The New Law
Emerging Growth Companies
The JOBS Act creates a new category of issuers, classified as “emerging growth companies” (“EMG”s), and permits them to take advantage of scaled-back disclosure, governance, and audit requirements.
An EGC is a company that:
• has completed an IPO after December 8, 2011; and
• has total annual gross revenues of less than $1 billion in its most recently completed fiscal year.
A company will cease to qualify as an EGC upon the earlier of:
• the end of the fiscal year during which it had total annual gross revenues of at least $1 billion;
• the end of the fiscal year following the fifth anniversary of the company’s IPO;
• the date on which the company is determined to have issued more than $1 billion in non-convertible debt during the prior three-year period; or
• the date the company qualifies as a “large accelerated filer.”
Scaled Disclosure and Exemptions
The following scaled disclosure and other exemptions apply to EGCs:
• An EGC may include only two years of audited financial statements in its IPO registration statement instead of three years.
• Selected financial data and the MD&A disclosure are not required for any period preceding the audited financial statements contained in the IPO registration statement.
• An EGC is not required to comply with new or revised audit standards until such standards are also applicable to private companies.
• An EGC is exempt from Section 404(b) of the Sarbanes-Oxley Act, which requires auditors to attest to management’s assessment of internal control over financial reporting.
• An EGC is exempt from mandatory audit firm rotation rules.
• An EGC is temporarily treated as a smaller reporting company (and thus exempt) for purposes of certain executive compensation disclosure requirements under Item 402 of Regulation S-K, as well as for the “say-on-pay” and “say-on-frequency” advisory shareholder votes.
Reduced Restrictions on Securities Offerings
Testing the Waters: An EGC may engage in oral or written communications with potential investors that are “qualified institutional buyers” or “institutional accredited investors” prior to the filing of a registration statement, to determine whether such investors might be interested in participating in an offering, without being subject to “gun jumping” restrictions.
Research Analyst Reports: Investment banks participating in a proposed public offering of an EGC may publish and distribute research reports relating to such EGC, without such research reports being treated as an offer to sell a security.
Private Placements: The JOBS Act eliminates restrictions on general solicitation and general advertising in connection with private placements under Rule 506 of Regulation D and Rule 144A of the Securities Act, provided that all purchasers in a Rule 506 offering are accredited investors and all purchasers in a Rule 144A offering are qualified institutional buyers. In addition, individuals who maintain platforms or mechanisms that facilitate private placements under Rule 506, and engage in general solicitation or provide certain ancillary services, are not required, solely because they maintain a platform or mechanism, to register as a broker-dealer under the Exchange Act, provided they do not receive any compensation in connection with the purchase or sale of the company’s securities.
Crowdfunding
Crowdfunding is a method of raising capital, often arranged via the internet, in which large numbers of people pool small individual contributions to invest in a company. The JOBS Act creates a new crowdfunding exemption from registration under the Securities Act, provided that the following key conditions are satisfied:
• The aggregate amount of securities sold in reliance on the crowdfunding exemption does not exceed $1 million during a 12-month period.
• The aggregate amount of securities sold to any investor during a 12-month period does not exceed:
○ the greater of $2,000 or 5% of the annual income or net worth of an investor with an annual income or net worth of less than $100,000; or
○ 10% of the annual income or net worth, up to a maximum of $100,000, of an investor with an annual income or net worth equal to or greater than $100,000.
• The issuer is not a reporting company under the Exchange Act.
• The crowdfunding transaction is conducted through an intermediary broker or funding portal that registers with the SEC.
• The intermediary satisfies a number of requirements in connection with the transaction, including providing risk disclosure, taking measures to reduce the risk of fraud, and ensuring that all offering proceeds are provided to the issuer only after the aggregate capital raised from all investors is equal to or greater than the target offering amount.
• The issuer provides investors and intermediates, and files with the SEC, certain information relating to the issuer, including the business and financial condition of the issuer, use of proceeds, target offering amount, and ownership and capital structure.
Analysis
While on its face, the JOBS Act appears to reduce the disclosure and cost burdens of being a public company, the JOBS Act does not actually address the root causes for the reluctance of companies to publicly list their securities, including the specter of securities class actions and heightened regulatory oversight. Ultimately, after the exemption periods expire, EGCs will be subject to the entire Sarbanes-Oxley and Dodd-Frank litany of rules and regulations, and will be forced to incur all the concomitant costs and expenses associated with the current SEC regulatory regime. The copious reporting requirements and the onerous auditing requirements that public companies are required to fulfill are just over the horizon, and we doubt that the JOBS Act will lead to a significant increase of IPOs for companies that are not already entitled to benefit from the smaller reporting company reduced reporting requirements. The most probable result of the Act is that companies that would have gone public in any event will utilize the JOBS Act to decrease their costs, without any significant benefits flowing to investors generally.
Please contact us if you would like to discuss this alert or receive additional information regarding the JOBS Act.
By: Steve Kronengold and David C. Zuckerbrot. © May 2012. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.