United States: JOBS Act At Year 1

Last Updated: April 15 2013
Article by Anna Pinedo

Any milestone, such as an anniversary, provides an opportunity for reflection and evaluation.  At the one-year anniversary of the JOBS Act, preliminary experience gives reason for some optimism.  The centerpiece of the JOBS Act, the "IPO on-ramp" provisions contained in Title I, have proven quite useful.  The SEC Staff's guidance in the form of Frequently Asked Questions (or FAQs) promptly filled the gaps in the legislation and helped facilitate prompt reliance on these new provisions.  It would be too soon to draw conclusions regarding the impact of the on ramp on IPOs in general, and smaller IPOs in particular.  The provisions relating to the Exchange Act threshold, which also were immediately effective, have already been relied upon by many smaller banks to suspend their ongoing reporting.  Most of the other provisions of the JOBS Act await further SEC rulemaking.  Below we provide a very brief "cheat sheet" of the status of the various provisions.  We believe that it is fair to say though that the JOBS Act has already had a profound effect on capital formation by restarting an important dialogue on SEC disclosure requirements and permissible communications that seemed to come to an end just after the Securities Offering Reform in 2005, when attention turned to executive compensation disclosures, corporate governance concerns, and ultimately the financial crisis.  The JOBS Act also has served to bring greater general awareness of the important changes that have taken place in the last decade in the way that promising companies choose to finance their growth.  Finally, even for the non-securities lawyers among us, the JOBS Act has focused attention on the divide between public and private offerings—challenging all of us to think more closely about the appropriateness of certain existing regulations that seem more and more "artificial" in the face of social media and other developments.

Title I (the IPO on-ramp)

  • This Title was immediately effective, so no SEC rules were required for this title to take effect.
  • The "IPO on-ramp" provisions generally have proven helpful for companies undertaking IPOs:
    • The SEC Staff immediately put out guidance in the form of FAQs.
    • Market participants have been cautious in relying on some of the accommodations available to EGCs; however, over time, market practice may shift.
    • Most EGCs are still presenting three years of financial information (instead of the permissible two years).
    • Most EGCs are taking advantage of the ability to present abbreviated executive compensation disclosures.
    • Most EGCs are taking advantage of the ability to submit their IPO registration statements for confidential review by the SEC, and relying on the confidential process for at least one or two rounds of SEC comments, before the first public filing.
    • EGCs also are benefiting from the delayed phase-in of other costly compliance requirements, like the Sarbanes 404 attestation requirement.
    • Now, at the one-year anniversary, a fair number (just over 100) of EGC IPOs have been completed.
    • Statistics indicate an increase in smaller IPOs, which, in part, was one of the desired outcomes of the JOBS Act.
  • In addition to providing a new approach for EGC IPOs, Title I also addresses analyst research issues, and requires that the SEC undertake several studies.
  • Research
    • Even after the JOBS Act, the unlevel playing field remains as to research, as a result of the Attorney General Settlement, the terms of which have not been modified.
    • FINRA modified its rules in accordance with the JOBS Act.
    • Most investment banks now have settled (informally) on a 25-day post IPO quiet period before publishing research following completion of an IPO.
    • There is no evidence that investment banks are interested in releasing pre-deal research reports for EGCs.
    • Additional regulatory changes would be needed in order to promote additional research coverage for EGCs.
  • Studies
    • The SEC published the required decimalization study and held a decimalization roundtable; a consensus has formed that a pilot program should be initiated for larger tick sizes.
    • The required study on Regulation S-K has not been delivered.

Title II (Private placements)

  • The SEC proposed rules in August 2012 to carry out the JOBS Act mandate to relax the ban on general solicitation
    • The comment period closed in October 2012; however, the rules have not been finalized.
    • There was vigorous comment on the SEC's proposed rules, with some commenters advocating the adoption of a safe harbor relating to the measures that would be deemed "reasonable" to verify the status of investors; the adoption of content restrictions or guidelines for materials used in general solicitation; and a reexamination of the "accredited investor" threshold.
    • We anticipate that the SEC will seek to finalize the rules in the spring, and seek to finalize the "bad actor" provisions (required to be adopted for Rule 506 offerings by the Dodd-Frank Act) contemporaneously
  • Matchmaking sites
    • There were no rules needed in respect of the broker-dealer registration exemption for matchmaking sites
    • The SEC Staff put out guidance in the form of FAQs addressing various matters relating to the types of entities that might engage in these activities without subjecting themselves to broker-dealer registration.
    • The SEC Staff issued two no-action letters addressing the applicability of the exemption in the context of VC platforms.

Title III (crowdfunding)

  • No SEC rule proposal as yet (SEC missed deadline)
    • The SEC Staff published FAQs regarding the crowdfunding exemption.
    • FINRA has provided a form for collecting information about funding portals.
    • Concerns remain about the extent to which the crowdfunding exemption as contemplated by the JOBS Act could be used by ventures to raise small amounts of capital in a cost-efficient manner.

Title IV (Regulation A+ or Section 3(b)(2))

  • No SEC rule proposal as yet.
  • Now, pending legislation would mandate that the SEC take action by a date certain.

Titles V & VI (Exchange Act threshold)

  • These provisions relating to the Exchange Act threshold were immediately effective; SEC rulemaking was not required.
  • Many banks (over 100, according to published reports) have taken advantage of these provisions to suspend their SEC filings.
  • The SEC is expected to provide guidance regarding various "holder of record" issues.

What should you expect in the coming months?  We anticipate that the SEC will move ahead with finalizing the rules required under Title II to address general solicitation in certain Rule 506 and Rule 144A offerings.  We expect that this will be accompanied by the final "bad actor" rules required under the Dodd-Frank Act.  The discussion about general solicitation is likely to cause the SEC to revisit the "accredited investor" definition—perhaps resurrecting parts of the SEC's 2007 "larger accredited investor" standard.  Given the complexities to be addressed by the SEC and FINRA in connection with creating a framework for crowdfunded offerings and funding portals, we anticipate that a proposal relating to crowdfunding may not be released until the second half of 2013.  As we have already seen from meetings of various advisory committees, more attention likely will continue to be focused on rationalizing the disclosure requirements and the communications rules applicable to smaller public companies and companies that might have qualified for EGC status (but for the date of their initial offering of equity securities).  Given the higher registration thresholds under the Exchange Act, we may continue to see the development of a trend toward staying private longer, and the growth of markets designed to provide liquidity to investors in those companies.  Given the press of other business under both the JOBS Act and the Dodd-Frank Act, we may not see a proposal for exempt public offerings under Title IV in 2013.  Lastly, we would hope that the momentum toward encouraging capital formation that was created by the JOBS Act will not be lost in its second year of existence, and we will instead see continued dialogue—coupled with regulatory and market action—that is oriented toward creating opportunities to put capital to work companies of all sizes.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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