On March 27, 2012, the U.S. House of Representatives passed an
amended version of H.R. 3606, or the Jumpstart Our Business
Startups (JOBS) Act.1 The JOBS Act is being
characterized favorably by both the White House and Republican
Congressional leadership as a measure designed to facilitate
capital raising by reducing regulatory burdens. In particular, the
legislation creates a separate class of issuers under the
Securities Act and the Exchange Act called "emerging growth
companies." Those companies will be exempt from some of the
more onerous accounting and disclosure requirements currently
applicable to all public companies.
The JOBS Act had been previously approved by the U.S. Senate and
has been sent to the White House, where it is expected to be signed
by the President.
Highlights of the JOBS Act
Initial Public Offerings/Emerging Growth
Companies. The JOBS Act alleviates some of the burdens of
the IPO process and being a public company for "emerging
growth companies" by amending the Securities Act, the Exchange
Act, and the Sarbanes-Oxley Act to provide for reduced reporting
requirements (i) in IPO registration statements and (ii) for a
period of up to five years after an emerging growth company's
IPO. "Emerging growth companies" are generally defined as
issuers with annual gross revenues of less than $1 billion and a
public float of less than $700 million.2
Emerging growth companies will be:
- Exempt from auditor attestation of internal control assessments under Sarbanes-Oxley Section 404(b);
- Able to file an IPO registration statement with the SEC on a confidential basis, provided that the registration statement is filed publicly within 21 days of the commencement of the road show;
- Able to communicate with accredited investors and qualified institutional buyers in advance of potential IPOs, as well as follow-on and secondary public offerings;
- Able to involve research analysts more freely in the IPO process by permitting research to be published during the period immediately following the IPO; and
- Exempt from certain compensation disclosure requirements, as well as Dodd-Frank Act "say-on-pay" voting.
Furthermore, emerging growth companies will be subject to relaxed financial disclosure, accounting, and auditing requirements, including:
- The disclosure of only two years of audited financial statements (rather than three years);
- No mandatory disclosure of selected financial data for periods prior to those periods presented in its financial statements;
- A grace period with respect to certain new or revised financial standards; and
- An exemption from Public Company Accounting Oversight Board rules adopted after the date of enactment of the JOBS Act.
Because the emerging growth company provisions of the
legislation are subject to a December 8, 2011 effective date,
qualifying companies that have gone public after December 8, 2011
will be eligible for this special status.
Observations. These amendments are
clearly intended to help smaller companies access the U.S. capital
markets and are expected to significantly reduce the costs of
emerging growth companies going public and complying with public
company rules and regulations. This, together with the ability to
file a registration statement on a confidential basis and the
relaxation of "gun jumping" rules by enhancing
flexibility in communicating with potential investors prior to an
IPO, will encourage smaller companies to "test the
waters" without disclosing confidential information or
suffering adverse publicity should their IPOs be cancelled or
delayed. Accordingly, the JOBS Act will likely encourage emerging
growth companies to go public sooner in order to take advantage of
the other benefits of being a public company, such as investor and
employee liquidity, the availability of a liquid currency for
acquisitions, and favorable publicity.
Impact on Private Placements. The JOBS Act
requires the SEC to revise Regulation D to remove the prohibition
against general solicitation and advertising in offers and sales of
securities conducted under Rule 506, provided that the ultimate
purchasers of securities qualify as "accredited
investors" under the SEC's current definition. The
legislation also requires the SEC to make comparable changes to
Rule 144A to permit solicitation of nonqualified institutional
buyers, provided that only qualified institutional buyers purchase
the offered securities.
The JOBS Act requires the SEC to adopt implementing rules on these
changes to Regulation D within 90 days.
Observations. These changes represent a
major shift in the private placement process and provide issuers
and placement agents with additional tools to raise capital without
the burden and expense of filing a registration statement. These
changes permit persons engaging in unregistered transactions to
enjoy many of the same benefits of public offerings, but avoid the
time constraints of SEC review and the burden of SEC
registration.3.
Among the topics that the SEC must address in its rulemaking is
what steps an issuer must take to verify "accredited
investor" status.4
Registration Threshold. The legislation also
raises the threshold for registration under the Exchange Act. The
JOBS Act amends Section 12(g) of the Exchange Act to increase the
limit on shareholders of record from 500 to 2,000 or, in the
alternative, 500 persons who are not (i) "accredited
investors," (ii) employees of the issuer who received shares
pursuant to an employee compensation plan, or (iii) investors who
received shares under the "crowdfunding"5
exemption of the JOBS Act.6
Observations. The number of shareholders
of record of an issuer's equity securities often differs
markedly from the number of beneficial owners. These revisions do
not change the rules relating to DTC or shares held by private
equity funds or "special purpose vehicles." As a result,
the beneficial owners who hold their shares through DTC or these
other entities will continue to not be counted for purposes of this
revised threshold. This change will also allow certain issuers the
flexibility to stay private longer, while increasing their
shareholder base, without triggering public reporting obligations
that may result in further development of private secondary
markets. Finally, for private investment funds that rely on Section
3(c)(7) of the Investment Company Act, the increase in the
shareholder threshold will provide them with the flexibility to add
investors up to the new limit without registering under the
Exchange Act.
Footnotes
1.Available at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf .
2.anniversary of its IPO, but it would lose its status before the end of this period in the event its annual gross revenues equaled or exceeded $1 billion, it issued more than $1 billion of nonconvertible debt in a three-year period, or it became a "large accelerated filer" under SEC rules. Under SEC rules, a "large accelerated filer" is defined as an issuer that: (i) has at least $700 million in voting and nonvoting stock held by nonaffiliates as of the last day of its second fiscal quarter (analyzed at the end of such fiscal year); (ii) has been subject to the Exchange Act for at least 12 calendar months; and (iii) has filed at least one 10-K.
3.The JOBS Act also amends Section 3(b) of the Securities Act to require the SEC to establish an exemption for securities that are offered and sold in a 12-month period with an aggregate offering price not to exceed $50 million. This exemption contains conditions, including the requirement that covered issuers file audited financial statements annually with the SEC, and provides that the civil liability provisions of the Securities Act are applicable to offers and sales of these securities.
4.In order to comply with Sections 3(c)(1) or 3(c)(7) under the Investment Company Act, private funds (e.g., private equity, venture capital, real estate, and hedge funds) need to conduct their securities offerings in a manner that does not constitute a public offering. The JOBS Act addresses this issue by providing that an offering conducted under revised Rule 506 of Regulation D would also not be viewed as a public offering for purposes of the federal securities laws, including the Investment Company Act.
5.The JOBS Act's "crowdfunding" provisions would also exempt from registration small capital raising transactions—up to an aggregate amount of $1 million per year—with individual investors. The aggregate amount sold to each individual investor under this exemption is limited to a maximum amount based on the investor's income or net worth, and issuers engaged in eligible transactions must satisfy basic informational and SEC filing requirements, among other conditions.
6.The JOBS Act also provides for increased thresholds for banks and bank holding companies.
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