United States: JOBS Act Heralds New Era For Startup And Emerging Growth Company Financing

As forecast, on March 27 the U.S. House passed the Senate's amended version of the Jumpstart Our Business Startups Act (the JOBS Act), clearing the way for President Obama to sign the bill into law, which he is expected to do in the coming days.

The JOBS Act's stated purpose is to spur job creation and economic growth by improving access to capital for emerging growth companies. To do so, the JOBS Act will make some of the most significant changes to the U.S. securities law landscape in over a generation.

Although opinions vary on whether the JOBS Act will indeed drive job creation and economic growth or result in adverse unintended consequences, there is a clear consensus that the impact of the JOBS Act will be fundamental and far-reaching. Future Updates will be forthcoming as the Securities and Exchange Commission (SEC) meets its rulemaking obligations under the JOBS Act.

Securities Law Changes Under the JOBS Act

The JOBS Act eases several existing securities laws and regulations to make it easier and less costly for a startup or emerging growth company to raise capital either privately or through a less-regulated initial public offering.

Relaxes 500-Shareholder Threshold for Exchange Act Registration. The JOBS Act amends Section 12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act), to raise the threshold at which an issuer must register its securities with the SEC from 500 to 2,000 shareholders of record—provided that fewer than 500 such holders are non-accredited investors—and provides that employees receiving company securities under employee benefit plans are excluded when calculating the number of record holders for this purpose.

Relaxes Requirements for New Category of "Emerging Growth Companies." To improve access to capital markets, the JOBS Act creates a new category of issuer, the "emerging growth company," with relaxed initial public offering (IPO) registration requirements.

  • What Is an "Emerging Growth Company"? The JOBS Act defines an emerging growth company as an issuer with less than $1 billion in total annual gross revenue during its most recently completed fiscal year. Such a qualifying company will continue to be deemed an emerging growth company until the earliest of
    • the last day of the fiscal year during which it has total annual gross revenue of $1 billion or more,
    • the last day of the fiscal year following the fifth anniversary of its IPO,
    • the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt, and
    • the date on which it is considered to be a "large accelerated filer" under the Exchange Act (in short, when the public equity float reaches $700 million and the company has been public for at least one year).
  • New Category Applies Retroactively for IPOs After December 8, 2011. The JOBS Act also applies the definition of an emerging growth company retroactively to any issuer meeting the requirements so long as its IPO occurred after December 8, 2011.
  • Which Requirements Will Not Apply to Emerging Growth Companies? As an emerging growth company, an issuer will not have to comply with all of the requirements that would otherwise apply to a public company.
    • Only Two Years of Audited Financial Statements in IPOs. An emerging growth company will be required to include only two, rather than three, years of audited financial statements in its IPO registration statement.
    • No Sarbanes-Oxley Section 404 Auditor's Attestation Report on Internal Controls. An emerging growth company will not have to provide the auditor's attestation reports on internal financial reporting controls under Section 404(b) of the Sarbanes-Oxley Act of 2002.
    • No New U.S. GAAP Standards. An emerging growth company will not have to comply with any new or revised financial accounting standards not applicable to private companies.
    • Exempt From Some Potential New PCAOB Rules. An emerging growth company will not have to comply with any rules that the Public Company Accounting Oversight Board might adopt requiring audit firm rotation or auditor discussion and analysis of the issuer's financial statements.
    • No Dodd-Frank Act Compensation Disclosure. Additionally, an emerging growth company will be exempt from the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) for separate non-binding shareholder votes on executive compensation arrangements, including golden parachute compensation, during the period of time it qualifies as an emerging growth company—and for up to three years after it no longer qualifies. An emerging growth company will also not have to provide some of the compensation disclosure that would otherwise be required under the Dodd-Frank Act, including the disclosure requirements relating to pay versus performance and to the ratio of CEO pay to median employee pay that are currently scheduled for SEC rulemaking later this year.

Removes General Solicitation and Advertising Restrictions for Certain Private Offerings. The JOBS Act removes the prohibitions against general solicitation and advertising in private offerings made pursuant to Rule 506 of Regulation D and Rule 144A, subject to certain limitations.

  • For Rule 506 if All Purchasers Are Accredited Investors. For private offerings made pursuant to Rule 506, all purchasers must be accredited investors, and the issuer must take reasonable steps to verify its status as such, using methods determined by the SEC.
  • For Rule 144A if All Purchasers Are QIBs. For private offerings pursuant to Rule 144A, the securities must be sold only to persons that the issuer or seller reasonably believes are qualified institutional buyers.

Creates New $1 Million Crowdfunding Exemption. To permit the sale of securities through so-called "crowdfunding" strategies, the JOBS Act creates a new exemption under Section 4 of the Securities Act of 1933, as amended (the Securities Act), permitting certain issuers to publicly offer and sell, without registration under the Securities Act, up to $1 million of securities within any 12-month period, subject to certain conditions. Public companies, companies organized outside the United States and companies that are investment companies under Section 3 of the Investment Company Act of 1940 (excluded from the definition of investment company by Section 3(b) or Section 3(c) of that Act) will not be able to rely on the new crowdfunding exemption.

  • Per Investor Limit on Amount Sold. The aggregate amount sold by an issuer under the crowdfunding exemption to any investor in a 12-month period may not exceed:
    • if the investor's annual income or net worth is less than $100,000, the greater of $2,000 or 5% of the investor's annual income or net worth, or
    • if the investor's annual income or net worth is $100,000 or more, 10% of the investor's annual income or net worth, but not more than $100,000.
  • Requires Additional Disclosure to SEC and Investors. Further, the JOBS Act requires issuers using the crowdfunding exemption to file with the SEC, and provide to investors and brokers or funding portals, certain information, including the issuer's anticipated business plan; a statement of its financial condition, ownership and capital structure; and a description of the intended use of the financing proceeds.
  • Requires Intermediary Broker or Funding Portal Registered With SEC. The crowdfunding transaction must also be conducted through an intermediary broker or "funding portal" registered with the SEC that must, among other things, ensure that investors understand the risks of the investment and meet certain requirements.
  • No Advertising Permitted. Crowdfunding issuers may not advertise the terms of the offering except for notices directing investors to the broker or funding portal.
  • Purchased Securities Will Be "Covered Securities." Significantly, the JOBS Act provides that securities issued under the crowdfunding exemption are "covered securities," thus preempting the application of state blue sky laws to securities issued through crowdfunding transactions. In addition, states may require a filing or payment of a fee with respect to securities issued under the crowdfunding exemption only if the issuer's principal place of business is located in the state or the purchasers of 50% or more of the aggregate amount of the securities sold are residents of the state.

Modifies Requirements for Regulation A Offerings. By amending Section 3(b) of the Securities Act , the JOBS Act effectively modifies the Conditional Small Issues Exemption under Regulation A in several ways.

  • Raises Dollar Limit to $50 Million. These amendments raise the limit for Regulation A offerings, which are subject to fewer disclosure requirements, from $5 million to $50 million in any 12-month period.
  • Purchased Securities Could Be "Covered Securities." These amendments exempt Regulation A offerings from state securities laws as "covered securities" when the securities are either
    • offered or sold through a broker-dealer or on a national securities exchange or
    • sold to a qualified purchaser, as defined by the SEC.
  • Also Adds New Requirements. Additionally, the amendment to Section 3(b) adds a provision for civil liability under Section 12(a)(2) of the Securities Act for false or misleading statements or omissions in written or oral communications involved in such an offering, and it requires issuers to file audited financial statements annually with the SEC and to make certain other disclosures to investors as the SEC requires.

Implications for Private Investment Companies

In what is likely an unintended consequence, the JOBS Act makes a number of changes to traditional understandings and practices regarding what is a "public offering" under the exclusion provisions for private investment companies in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (the 1940 Act). The SEC Division of Investment Management has consistently taken the position that the concept of a public offering in the 1940 Act and the Securities Act are co-terminus, and it has rejected any notion that the term "public offering" could have a different meaning under the 1940 Act than it has in the Securities Act. With the changes to the parameters of a "public offering" under the Securities Act, the JOBS Act would seem to seriously challenge that position, and the Division of Investment Management will have to decide whether to maintain its traditional co-terminus position (which would significantly liberalize the notion of "public offering" for private equity funds and hedge funds) or to take the position that the term "public offering" in the 1940 Act has a different meaning than the term "public offering" in the Securities Act.

The JOBS Act's elevation of the registration threshold under the Exchange Act from 500 to 2,000 shareholders of record will also have implications for private investment companies relying on Section 3(c)(7) of the 1940 Act, which at present has only two requirements: (a) that there be no "public offering" and (b) that offers and sales of securities be made only to qualified purchasers. Although there is no stated limit to the number of shareholders in a Section 3(c)(7) fund, the issuers of such funds have traditionally observed a 500-shareholder ceiling to avoid the registration requirements of the Exchange Act. Thus the elevated threshold for registration under the Exchange Act will effectively increase the number of potential shareholders in a Section 3(c)(7) fund from 500 to 2,000.

JOBS Act Effective Dates

While the JOBS Act's amendments establishing the so-called "on-ramp" to IPOs for emerging growth companies will take effect upon enactment, the other provisions of the JOBS Act will require extensive rulemaking by the SEC. The JOBS Act sets a tight deadline—90 days—for the SEC to amend Rules 506 and 144A to remove the prohibitions against general solicitation and advertising in private offerings pursuant to those rules. The SEC has a longer period—270 days—to make new rules to implement the JOBS Act's crowdfunding exemption, which is still an ambitious timeline. The SEC must also amend Regulation A for the new $50 million limit and revise its regulations in accordance with the JOBS Act's higher Exchange Act registration thresholds, but the Act specifies no deadlines for the SEC to implement these changes.

Additional Information

You can find the full text of the JOBS Act at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf. You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to public companies on our website.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions