On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”), a measure enacted by Congress to facilitate capital formation by public and private businesses. This bulletin summarizes certain key provisions of the new law.
The JOBS Act takes a two-pronged approach to improving businesses’ ability to raise capital. First, the JOBS Act streamlines the IPO process and reduces disclosure and other requirements applicable to so-called “emerging growth companies,” thereby encouraging such companies to go public. Second, the Act eases regulatory restrictions on capital formation for private companies that wish to remain private.
Streamlined IPO Process and Exemptions for Emerging Growth Companies
The JOBS Act amends the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) to provide a definition for a new category of issuers— the emerging growth company (“EGC”). These amendments are effective immediately.
An EGC is an issuer that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. Companies that qualify as EGCs and complete an IPO on or after December 8, 2011 remain qualified until the earlier of:
- the last day of the fiscal year during which the company had total annual gross revenues of $1 billion or more;
- the last day of the fiscal year following the fifth anniversary of its IPO;
- the date as of which, during the previous three-year period, the company has issued more than $1 billion in non-convertible debt; or
- the date on which the company is deemed to be a “large accelerated filer,” such term generally referring to companies with a public equity float of $700 million or more.
The JOBS Act establishes numerous exemptions that facilitate IPOs by EGCs. Specifically, EGCs are:
- permitted to provide two years of audited financial statements (instead of three) in their IPO registration statements and in any subsequent registration statements or periodic reports;
- not required to provide selected financial data for any period before the earliest audited financial period presented in their IPO registration statements;
- permitted to submit their IPO registration statements for SEC review on a confidential basis, provided that the company must publicly file all draft registration statements no later than 21 days prior to commencing its IPO road show;
- exempt from compliance with new or revised accounting standards until private companies are required to comply with such standards;
- permitted to comply with Regulation S-K executive compensation disclosure requirements applicable to “smaller reporting companies” (generally, companies with public equity floats of less than $75 million); and
- permitted to communicate orally or in writing with potential investors that are qualified institutional buyers or institutional accredited investors to assess their interest in a potential offering, before or after filing of the applicable registration statement.
The JOBS Act also (i) allows broker-dealers to publish research reports on EGCs before, during or following their IPOs, even if the broker-dealer is participating in the offering, and (ii) permits research analysts to communicate with investors and management in connection with an EGC’s IPO, even if investment bankers are present; broker-dealers and analysts are generally prohibited from engaging in such activities with respect to non-EGC companies.
In addition, the JOBS ACT provides that EGCs are:
- exempt from stockholder advisory votes on executive compensation and golden parachutes and disclosure comparisons of executive pay and financial performance and the ratio between CEO compensation and median compensation of company employees;
- exempt from the provisions of the Sarbanes-Oxley Act requiring auditor attestation to a company’s internal control over financial reporting; and
- exempt from Public Company Accounting Oversight Board regulations requiring mandatory audit firm rotation or an expanded auditor report.
Reforms Relating to Private Capital Formation
Offerings Pursuant to Regulation D and Rule 144A.
With respect to private companies, the JOBS Act directs the SEC to adopt rules to eliminate the prohibition against general solicitation and general advertising for select private placements made under Rule 506 of Regulation D and/or Rule 144A. The revised rules must permit general solicitation or general advertising for private placements under Rule 506 when all of the purchasers of the securities are accredited investors, provided that the issuer relying on Rule 506 takes reasonable steps to verify (such methods of verification to be determined by the SEC) that all purchasers are accredited investors. For Rule 144A offerings, the revised rules must allow offers to be made to persons other than qualified institutional buyers via general solicitation or general advertising, provided that the securities are only sold to persons that the issuer or any person acting on behalf of the issuer reasonably believes are qualified institutional buyers.
Increased Regulation A Offering Limit and Crowdfunding.
Regulation A provides an exemption from registration for offerings of up to $5 million per year. Under the JOBS Act, the SEC is required to revise Regulation A to increase the cap to $50 million, provided that issuers relying on the exemption must file audited financial statements with the SEC and may be subject to periodic reporting requirements.
The Act also establishes an exemption for “crowdfunding”—a method of raising capital by selling small amounts of securities to numerous purchasers. Under the crowdfunding exemption, issuers are permitted to raise up to $1 million during any 12-month period. Likewise, the Act imposes limits on the amounts that investors are permitted to invest in a particular issuer’s crowdfunding during any 12-month period. If an investor’s annual income or net worth is less than $100,000, the investor is permitted to invest up to the greater of $2,000 or 5% of its annual income or net worth; if an investor’s annual income or net worth is equal to or more than $100,000, the investor is permitted to invest 10% of its annual income or net worth, up to a cap of $100,000. Additionally, the Act requires that crowdfunding offerings be conducted through a broker or a “funding portal” that meets specified conditions, and it imposes certain restrictions on crowdfunding issuers (e.g., no general advertising of crowdfunding offering terms, other than directing investors to consult the offering broker or funding portal).
Increased Threshold for Exchange Act Registration.
In addition to the reforms described above, the JOBS Act amends Section 12(g) of the Exchange Act to raise the threshold for registration. Previously, issuers having more than $10 million in total assets and a class of equity securities (other than exempted securities) held of record by 500 or more persons were generally required to register under the Exchange Act. The JOBS Act relaxes the shareholder limitation, requiring registration only when a class of a company’s equity securities (other than exempted securities) are held of record by either 2,000 persons or 500 persons who are not accredited investors. Additionally, employees who receive securities pursuant to an employee compensation plan do not count toward the shareholder limit. The Act directs the SEC to promulgate rules establishing (i) the meaning of securities “held of record” and (ii) a safe harbor for determining whether employees can be excluded from the definition.