United States: The JOBS Act And Its Potential Effect On Private Placements

As of March 28, 2012, both the U.S. Senate and House of Representatives have passed the Jumpstart Our Business Startups Act (JOBS Act) and the bill now only awaits President Obama's signature before it is enacted into federal law. The JOBS Act is a combination of six separate bills and, if enacted, will have a significant impact on the offering and private placement provisions of the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act).

The JOBS Act, as conveyed by Congress, is designed to stimulate the American economy and restore opportunities for America's primary job creators: small businesses, startups and entrepreneurs. If enacted, the JOBS Act would modify current securities laws with regard to private offerings in two significant ways: It would remove the prohibition on general solicitation and advertisement by issuers relying on Rule 506 of Regulation D under the Securities Act; it would also increase the investor thresholds provided by Section 12(g) of the Exchange Act that trigger public company reporting requirements. These provisions will fundamentally change the way private funds are offered and sold.

Regulation D Private Placements – Removal of Prohibition Against General Solicitation and Advertisement

The JOBS Act would require the Securities and Exchange Commission (SEC), within 90 days of its enactment, to revise Rule 506 of Regulation D under the Securities Act to provide that the prohibition against general solicitation or general advertising contained in Rule 502(c) of Regulation D does not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. This is a very significant development for sponsors of hedge funds, private equity funds and venture capital funds as it will allow them to raise capital in a much broader manner and eliminate the "one on one" method that is in place today.

Increase of Threshold To Trigger Registration Under the Exchange Act

The JOBS Act would also amend Section 12(g) of the Exchange Act to raise the thresholds that trigger public company reporting. Currently, Section 12(g)(1) of the Exchange Act requires that issuers must register under the Exchange Act if they have total assets exceeding $1 million (although Rule 12g-1 provides an exemption for issuers with assets of less than $10 million, effectively increasing this amount to $10 million) and 500 or more shareholders. The JOBS Act would amend Section 12(g)(1) to raise these thresholds to $10 million in assets and 2,000 shareholders (500 of which may be shareholders who are not accredited investors). The amendment would also exclude employees receiving company securities under equity compensation plans from the Section 12(g) calculation. If enacted into law, this change would not affect 3(c)(1) funds, but it would allow 3(c)(7) funds to accept up to 1,999 qualified purchasers.

Conclusion

As stated above, the final hurdle for the JOBS Act to become official law is President Obama's signature of approval. On March 22, 2012, the day the Senate passed on the JOBS Act and sent it to the House of Representatives for its final approval, the White House Press Secretary issued a statement commending the Senate for its bipartisan efforts in passing the bill and urging the House to adopt the bill as approved by the Senate. This statement indicates that President Obama likely will sign the bill into law. We will keep you updated on any future developments with regard to the JOBS Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.