On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the JOBS Act). The purpose of the JOBS Act is to expand and ease methods of capital raising by, and relax the regulatory burden on, smaller companies.
The most significant provisions of the new law:
- Create a new category of emerging growth companies that are subject to less burdensome SEC rules in initial public offerings;
- Eliminate prohibitions on general solicitation and advertisement in limited offerings solely to accredited investors under Rule 506 and qualified institutional buyers under Rule 144A;
- Provide a new exemption from federal securities registration requirements for "crowd funding" activities; and
- Raise the threshold requiring the filing of periodic reports under the Securities Exchange Act of 1934 for smaller public companies.
IPOs For Emerging Growth Companies
Effective immediately, Title I of the JOBS Act exempts an emerging growth company who has completed its Initial Public Offering (IPO) on or after December 8, 2011, from certain federal securities regulations. An emerging growth company is a company with annual gross revenues of less than $1 billion during its most recent fiscal year. A company will retain emerging growth company status until the earliest of:
- The first fiscal year after is annual revenues exceeds $1 billion;
- The first fiscal year following the fifth anniversary of its IPO;
- The date on which the company has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or
- The first fiscal year in which the company is deemed a large accelerated filer (reporting companies with a market value of public float in excess of $700 million).
An emerging growth company will be exempt from:
- The requirement to hold stockholder advisory votes on executive compensation and golden parachute compensation;
- The requirement to provide three years of audited financial statements in their IPO registration statements (only two years of audited financial statements required);
- The requirement to provide certain other executive compensation disclosure under S-K Item 402 (must only comply with the provisions that apply to smaller reporting companies);
- The requirement to have an auditor attestation of the company's internal controls and procedures;
- The requirement to publicly file an IPO (instead may submit confidentially to the SEC, provided the registration statement is publicly filed at least 21 days before any road show);
- PCAOB rules regarding mandatory audit firm rotation or an expanded auditor report; and
- Restrictions on communications ahead of public stock offering filings, provided communications only with potential investors that are qualified institutional buyers (QIBs) or institutions that are accredited investors.
In addition, the JOBS Act relaxes rules relating to research reports on emerging growth companies, and prohibits certain restrictions on research analysts reporting both before and after completion of an IPO.
Public Solicitation in Exempt Limited Offerings
1. Public Solicitation in Limited Offerings
Title II of the JOBS Act removes the prohibition on general solicitation and advertising for offers and sales made under the limited offering exemption contained in SEC Rule 506; provided, that the issuer takes steps to assure that all purchasers are accredited investors. SEC Rulemaking is necessary to implement the new, permissive use of public solicitation. The SEC has been directed to revise Rule 506 within 90 days after the date of enactment (by July 4, 2012).
Title II also requires the SEC to amend Rule 144A to permit offers of securities under Rule 144A using general solicitation and advertising, provided that the securities are only sold to persons reasonably believed to be QIBs. Again, SEC rulemaking is required, with a deadline of July 4, 2012 to implement rules.
2. Exemption from Broker Dealer Regulation in Limited Offerings
Title II of the JOBS Act also amends Section 4 of the Securities Act of 1933 by adding two new provisions. Any person acting to bring issuers and potential purchasers together for a Rule 506 offering will not be required to register with the SEC as a broker or dealer if that person complies with certain requirements, including that it may not:
- Receive any compensation in connection with the purchase or sale of the securities; or
- Have possession of customer funds or securities in connection with the purchase or sale of the securities.
Expansion of Regulation A Offerings
Regulation A has long provided an exemption for small offerings of less than $5 million, but it includes an SEC filing requirement. Regulation A is only available to "non-reporting companies" that do not file periodic reports under the Securities Exchange Act of 1934. The JOBS Act significantly expands the Regulation A exemption by:
- Increasing the maximum aggregate offering size from $5 million to $50 million of equity securities in any 12 month period;
- Permitting issuers to "test the waters" by soliciting interest before filing an offering statement with the SEC; and
- Providing that the equity securities sold in the offering will be "free trading" and not restricted as to resales.
Regulation A will continue to be unavailable to issuers whose promoters include "bad actors" with enforcement histories. In addition, Regulation A will require issuers using the exemption to annually file audited financial statements with the SEC.
Finally, securities sold under the revised Regulation A will be "covered securities" under the Securities Act, preempting state securities registration requirements.
The JOBS Act creates a new exemption from the Securities Act for "crowdfunding" activities, in which up to $1 million can be raised without having to comply with the registration provisions of the Securities Act. Crowdfunding is the new process of using social media to obtain small contributions from many individuals. Implementation of this title of the JOBS Act requires SEC Rulemaking.
The SEC has until December 31, 2012, to adopt these rules.
The JOBS Act limits the amount of money that individuals can invest with a company for the 12 months following the crowdfunding transaction. Investors with annual income or net worth below $100,000 can invest up to $2,000 or 5% of their net worth annually, and larger investors may invest up to $100,000 or 10% of their net worth annually. Issuers will be required to make a filing with the SEC, and crowfunding activities must be conducted through a broker or funding portal that is registered with the SEC an an applicable self-regulatory organization.
Increased Threshold for Becoming a Reporting Company and for Reports by Smaller Banks
The JOBS Act increases the shareholder threshold for mandatory filing of periodic reports under the Securities Exchange Act of 1934 from 500 shareholders of record or either 2,000 shareholders or 500 non-accredited individual investors. Employee shareholders who received their shares in an employee compensation plan are not counted in counting the number of shareholders.
Finally, In the case of banks or bank holding companies, such as community banks, the duty to file reports under the Exchange Act is suspended for banks and bank holding companies with fewer than 1,200 shareholders of record.
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