While still in proposed form, and subject to significant political uncertainty, we offer this summary of the impact of the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act). This summary is based on the version that passed the House on March 8, 2012, and was brought to the Senate floor on March 19, 2012. On March 20, 2012, the Senate failed to achieve sufficient votes to substitute the JOBS Act for the INVEST in America Act of 2012 (technically, it would have been the “Invigorate New Ventures and Entrepreneurs to Succeed Today in America Act of 2012,” but I think the acronym is a LOT better in this case), which contained some similar, but not identical, provisions. Accordingly, it appears that the JOBS Act, as adopted in the House, may be voted upon by the Senate this week.
Emerging Growth Companies
The bulk of the JOBS Act, and focus of most of the congressional debate, is on the creation of a new class of registered companies deemed “Emerging Growth Companies.” These registrants are not limited by business operations, and banks and bank holding companies could quality. An Emerging Growth Company would generally consist of newly public companies (IPO registration statement effective after December 8, 2011), with market caps of less than $750 million and total gross annual revenues (presumably interest income plus non-interest income for banks) of less than $1 billion. New registrants could quality for Emerging Growth Company status for up to five years following their IPO, at which time they would lose the advantages of being an Emerging Growth Company even if they otherwise continued to qualify.
An Emerging Growth Company would be exempt for the say on pay vote, as well as pay vs. performance and pay equality disclosures, and would not be required to have independent auditors attestations regarding internal controls under SOX 404. In addition, they would be eligible to generally rely on the scaled disclosures otherwise permitted for smaller reporting companies. In addition, an Emerging Growth Company would be provided the opportunity to initially file their draft IPO materials confidentially with the SEC and otherwise have greater flexibility in communications with regard to their IPO.
Modification of Securities Offering Exemptions
Within 90 days of passage, the SEC would be required to amend Regulation D and Rule 144A to permit general solicitation and advertising in Rule 506/Rule 144A offerings so long as the securities are only sold to accredited investors or qualified institutional buyers, respectively.
The JOBS Act would also create a new Section 4(6) exemption under the Securities Act of 1933 to permit “Crowdfunding.” Generally, issuers would be able to sell, without registration or reliance on an another exemption, up to $1 million in any 12 month period (or $2 million if audited financial statements are provided to investors). Individual investors would be limited to not invest, in any 12 month period, more than the lesser of $10,000 or 10 percent of the investor’s annual income. Any investors participating in such an offering would also be excluded from the “holders of record” calculations for purposes of SEC registration. The new “Crowdfunding” exemption includes a number of procedural steps that would need to be complied with, but will also provide preemption from applicable state securities law registration requirements. Accordingly, it could provide a means for small community banks to raise up to $2 million in any given 12 month period with minimal legal cost and without needing to limit themselves to accredited investors. While not initially designed for community banks, it could help private community banks better integrate with their communities via their shareholder base.
“Super” Regulation A Authority
The JOBS Act would create an additional exemption under Section 3(b) of the Securities Act to permit aggregate offerings of up to $50 million in any 12-month period (up from the existing $5 million requirement under the existing statute and Regulation A). The JOBS Act merely authorizes the SEC to establish this exemption, so the details (and attractiveness) of the exemption are still be determined. Based on the statutory language and history of Regulation A, it would appear that compliance with the exemption would likely require the filing (and review) of offering materials with the SEC, but then generally permit public sales of securities without resale restrictions. Like the existing Regulation A, issuers relying on the exemption would presumably not become subject to the periodic reporting requirements applicable to public companies, although the statute does require that issuer file audited financial statements with the SEC annually.
Increased Thresholds for SEC Registration and Deregistration
Under the JOBS Act, the statutory threshold for SEC registration for banks and bank holding companies would be increased from 500 shareholders of record to 2,000 shareholders of record. (For companies that are not banks or bank holding companies, the threshold would be 2,000 total shareholders of record or 500 non-accredited shareholders of record.) This will allow banks and bank holding companies to increase their shareholder base without triggering SEC registration (and shareholders obtained through the “Crowdfunding” exemption would be further excluded from the count of shareholders of record. No other changes are proposed as to how to count “shareholders of record.”
The statutory threshold for exiting SEC registration would also be increased for banks and bank holding companies (but not for other companies). For banks and bank holding companies, the statutory cap before a registrant can terminate their registration under Section 12(g) and suspend their registration under Section 15(d) has been increased from 300 to 1,200 shareholders of record. If passed, this could cause a significant number of community banks to reconsider whether SEC registration is an appropriate cost for their shareholders, and may enable a significant number of public bank holding companies to “go dark” without engaging in a “going private” transaction, while also increasing the possibility of larger institutions that may exceed the new 1,200 trigger considering a going private transaction.