After years of (perhaps excessive) regulation aimed at promoting transparency and accountability, the JOBS Act, signed by the President and overwhelmingly passed by Congress, undoes many of these requirements for companies that have the least experience in providing appropriate information upon which an investor can base its investment decision. It may also open the gateway for investors who arguably aren’t armed with the financial knowledge to protect themselves – they may just put it all on red and let it ride.
It will be interesting to monitor the effects of the JOBS Act and see how many jobs are actually created and how much of the capital markets money comes back on shore. Those who are good, securities law-abiding citizens should be able to take advantage of these provisions to provide funding to worthy companies on a rapid and, hopefully, reduced cost basis. But buyer beware: if it sounds too good to be true, it probably is.
In summary, there are seven aspects to the JOBS Act:
- it authorizes “crowd-funding” – the ability for a company to raise up to $1 million in a 12-month period; securities can be offered to ANYONE (whether or not accredited), through a broker or “funding portal,” with certain information to be provided to investors including financial statements (audited required only for offerings in excess of $500,000) and offerings are exempt from state regulation (bye, bye Blue Sky);
- it creates a new category of companies – “emerging growth company” – companies with less than $1 billion in annual revenues (perhaps a lower threshold may have been wiser?) for up to five years after an IPO, which are exempt from “say on pay” rules, CD&A disclosure and Section 404(b) of Sarbanes-Oxley (look Mom, no outside auditors review the financial controls), only have to deliver two years of audited financials, and can conduct an IPO with research reports coming out during the quiet periods (finally, we can all chat during nap time);
- it removes the ban on general solicitation and advertising in Regulation D Rule 506 offerings, provided all investors are accredited;
- it reforms Regulation A offerings – the limit on these offerings is now raised to $50 million but does require audited financial statements (yes, auditors, you still have a purpose), and they are exempt from blue sky law if sold to “qualified purchasers”;
- it raises the mandatory reporting requirements from 500 record shareholders to 2,000 (thanks, Facebook!) or 500 non-accredited investors (but who will be able to know?);
- it requires that the SEC study decimalization of how securities are quoted; and
- it requires that the SEC review the Regulation S-K disclosure regime to determine if the provisions can be updated and modernized.
How all of these directives affect the capital markets or if they just create more bucket shops, as some critics argue, remains to be seen. In any event, it will be fun to watch the Super Bowl commercials for the next big thing and then text in your order for stock!