United States: Jobs Act 3.0?

Last Updated: July 27 2018
Article by Cydney Posner

Will there be a JOBS Act 3.0? The JOBS and Investor Confidence Act of 2018 just passed the House by a vote of 406 to 4, so, even though Senators may often be chary of jumping on the House bandwagon—remember the doomed Financial Choice Act of 2016 and then 2017— the overwhelming and bipartisan approval in the House still makes the odds look better than usual.

What does the bill, S. 488, do? (Don't be misled by the Senate designation—the version that passed the House is a complete substitution for the Senate version, so the bill still requires a vote in the Senate.) While the bill tackles a lot of subjects, from human trafficking to international insurance standards, it contains several provisions of interest to public and thinking-of-becoming-public companies:

  • requires the SEC to amend Reg D to modify the definition of general solicitation to exclude certain presentations to angel investor groups and others;
  • amends the definition in the Securities Act of "accredited investor" (and mandates follow-up rulemaking) to index the $1 million net worth test for inflation and to add registered brokers and investment advisors as well as natural persons that have "professional knowledge" with education or job experience verified by FINRA or other SROs;
  • allows crowdfunding investors to form "crowdfunding vehicles" advised by registered investment advisers;
  • permits the registration of "venture exchanges," that is, alternative exchanges established, either independently or as a tier of another exchange, "solely for the purposes of trading venture securities," which are largely smaller or emerging growth public and non-public companies or companies with low trading volumes;

SideBar

According to this opinion piece in the WSJ by Congressman Jeb Hensarling, Chair of the House Financial Services Committee, this provision is designed to address the problem that "too many companies that go public wither on the vine because their stocks are thinly traded and subject to high volatility. A stock with 10,000 shares of daily trading volume should not be regulated the same as one with 10 million shares. The House would address this disparity by allowing the creation of venture exchanges. Concentrating a small issuer's trading into a single exchange would aggregate liquidity and help attract post-issuance support, including research, sales and capital commitments by market makers. This would be a game-changer for many small issuers."

  • amends the Securities Act to allow non-EGCs to "test the waters" with qualified institutional buyers or institutional accredited investors and to submit confidential draft registration statements at their IPOs and within one year post-IPO;

SideBar

You might recall that the JOBS Act, which was signed into law in April 2012, allowed IPO candidates that were EGCs to "test the waters." The test-the waters provisions in the JOBS Act significantly relaxed "gun-jumping" restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with QIBs and institutional accredited investors to determine the potential level of investor interest before committing to the expensive and time-consuming prospectus drafting and SEC review process. (See this Cooley Alert.) Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. That flexibility, together with the then-new confidential IPO filing process—which allowed EGCs to start the SEC review process on a confidential basis so that sensitive information would not be disclosed if they ultimately determined not to move forward with the offering—was intended to promote and facilitate access to the public capital markets. In June 2017, Corp Fin extended the confidential filing process, permitting non-EGCs to submit confidential draft registration statements for IPOs and for most offerings made in the first year after going public. The amendment in JOBS 3.0 would conform the Securities to Act to current SEC practice. In February of this year, the WSJ reported that "people familiar with the matter"—every reporter's favorite source—said that the SEC is "weighing" expanding "test the waters" beyond just EGCs. The article reports that close to 40% of eligible EGCs conducting IPOs took advantage of testing the waters in 2015, but the percentage fell to less than 25% in 2016. Although, according to the article, the SEC does not "view testing the waters as a panacea for the diminished appeal of going public," some regulators do seem to believe it will encourage companies to go public: at the San Diego Securities Conference in January, the article reports, Corp Fin Director William Hinman argued that "[i]f we can be successful in reducing the burdens associated with joining the public capital markets, we think we will get companies to join us at an earlier stage." A 2017 Treasury report also recommended expanding this provision of the JOBS Act to allow all companies, not just EGCs, to "test the waters." (See this PubCo post and this PubCo post.)

  • amends SOX 404(b) to add a temporary exemption from the internal controls auditor attestation requirement for any company that ceased to be an EGC after the 5th anniversary of its IPO, is not a large accelerated filer and had average annual gross revenues (over the last three years) of less than $50 million as of its most recently completed fiscal year; the exemption would expire at the earliest of the end of the first fiscal year after the 10th anniversary of its IPO, when its average annual revenue exceeded $50 million or it became a large accelerated filer;
  • requires the SEC to conduct an analysis and report on the costs and benefits to companies, investors and other market participants of the Form 10-Q requirement for EGCs and other reporting companies, including the costs and benefits of the public availability of the information required to be filed on Form 10–Q, the use of a standardized reporting format across all classes of reporting companies, and quarterly disclosure by some companies of financial information in formats other than Form 10–Q, such as a quarterly earnings press release;

SideBar

Ironically, as the bill seeks to reduce required disclosure, research discussed in this article from CFO.com suggests that less disclosure can lead to higher risk premiums for issuers. The study looked at data from a sample of 376 companies, which included all U.S. IPOs conducted between July 1, 2009 and December 31, 2013. After comparing the IPOs of EGCs (which are subject to reduced disclosure requirements) with those of non-EGCs (companies that would have been EGCs had their IPOs occurred post-JOBS Act), the study found "considerably greater underpricing and volatility for shares of the EGCs than for those of the NEGCs in the wake of their respective IPOs." The study authors attributed the underpricing to "a risk premium that investors demand to compensate them for their uncertainty about the value of the firm." According to the article, the authors "found shares of EGCs to be, on average, about 12% more volatile post-IPO than those of NEGCs. And when it comes to underpricing, the contrast between the two groups was even more striking. On IPO days, the underpricing of EGC shares (the difference between the initial offering price and the price at day's end) was on average about 55% greater than the underpricing of NEGC shares, and at 30 business days post-IPO it was more than 100% greater. At that point the difference in underpricing between the average EGC and the average NEGC amounted to a hefty 13% of IPO proceeds."

  • requires the SEC to conduct a study of and report on the issues affecting the availability of investment research for small issuers, including EGCs and companies considering IPOs, taking into account factors such as costs, conflicts of interest, competition, payment for research, concentration of investment advisers and broker-dealers, the Global Research Analyst Settlement (see this Cooley News brief), SEC and other rules, liability concerns and the "unique challenges faced by minority-owned, women-owned, and veteran-owned small issuers in obtaining research coverage";
  • requires the SEC to study and report on whether Rule 10b5-1 should be amended (and, if so, conduct conforming rulemaking) to restrict the ability of issuers and insiders to adopt 10b5-1 plans only to permitted trading windows, limit the ability to adopt multiple overlapping trading plans, establish mandatory delays between plan adoption and first trades, limit the frequency of plan modifications and cancellations, require that plans be filed with the SEC and, for issuer plans, require that boards adopt relevant policies and monitor plan transactions;
  • amends the Exchange Act to require the SEC to mandate proxy disclosure, for companies with multi-class share structures, regarding the shareholdings and voting power of all classes of securities for all directors, nominees, NEOs and 5% holders; and
  • requires the SEC, in consultation with FINRA, to study and report on the direct and indirect costs associated with IPOs by small- and medium-sized companies, such as underwriter fees, legal compliance costs, and to consider those costs relative to other financing alternatives as well as their impact on capital formation.

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.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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.

Disclaimer

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.

General

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