On March 8, 2012, by a vote of 390-23 and with the support of the White House, the US House of Representatives passed H.R. 3606, also known as the Jumpstart Our Business Startups (JOBS) Act, legislation aimed at making it easier and less costly for emerging growth companies to raise capital privately and in initial public offerings (IPOs).
Among the key features of H.R. 3606 are the following:
Eases auditing and disclosure requirements in IPOs for small and mid-sized companies—reducing time to market and applying downward pressure on offering costs—and reduces disclosure and proxy requirements during transitional post-IPO period
- Requires only two, instead of three, years of audited financial statements in IPOs
- Eases certain Sarbanes-Oxley requirements
- Increases ability of participating underwriters to publish research reports around the time of the IPO
- Facilitates private placements of securities
The bill introduces a new category of issuer—an "emerging growth company"—with annual gross revenues of less than $1 billion. Under the bill, emerging growth companies may rely on some of the scaled disclosure requirements that are already available to companies having a public float of less than $75 million. Among other things, emerging growth companies could include only two, rather than three, years of audited financial statements in their IPO registration statement. During a transitional "on ramp" period following the IPO, these companies would also be permitted to omit the auditor's attestation on internal control over financial reporting, required by the Sarbanes-Oxley Act. The auditor's attestation is otherwise required to be provided by a company with a public float of $75 million or more beginning with the company's second annual report after its IPO. During the "on ramp" period, emerging growth companies also would not have to submit say-on-pay, say-on-pay frequency and say-on-parachute votes to their stockholders and would face less burdensome disclosure requirements for executive compensation than larger companies. The "on ramp" period would end when the issuer no longer qualifies as an "emerging growth company," i.e., after five years or when the issuer has a public float of at least $700 million (and has been a public company for at least one year) or annual gross revenues of at least $1 billion, whichever occurs first. SEC Chairman Schapiro has asked the Senate Banking Committee to consider lowering the annual revenue threshold from the proposed $1 billion and not to include the auditor's attestation exemption in the legislation.
The legislation also permits brokers and dealers, including underwriters participating in an IPO of an emerging growth company, to publish research reports regarding the company or its securities around the time of the IPO. This measure is intended to increase visibility for emerging growth companies in the period immediately following the IPO. Presently, underwriters involved in an IPO cannot publish research reports regarding the company or its securities for 40 days after the IPO. The legislation would also remove rules requiring separation between research analysts and investment bankers who work in the same firm. It is noteworthy that the SEC Chairman has expressed concerns over potential conflicts of interest and urged that the existing protocols remain in place.
The bill would enable emerging growth companies to gauge interest in a contemplated offering by communicating with potential investors that are qualified institutional buyers or institutions that are accredited investors in the pre- and post-filing period. Under current rules, smaller companies can only engage in such pre-marketing communications if a registration statement is already on file.
The bill would also allow emerging growth companies the choice initially to submit their IPO registration statement on a confidential basis; however, the initial confidential submission and any amendments would have to be publicly filed not later than 21 days before the road show. This would mean that the registration statement, including any sensitive information contained in it, would initially not be publicly accessible.
In addition to easing IPO requirements, the bill is intended to facilitate private capital raising by permitting general solicitation and general advertising in private placements made under Rule 506 of Regulation D, as long as only "accredited investors" actually buy securities in those placements. Furthermore, the bill would create a new "crowdfunding exemption" from registration, under which companies could issue securities having a value of up to $1 million in any 12-month period ($2 million if the investors receive audited financial statements), as long as sales to any one investor do not exceed $10,000 or 10% of the investor's annual income, whichever is less. The bill also increases the number of stockholders of record a company with more than $10 million in assets must have prior to triggering the SEC's registration and periodic reporting requirements under the Securities Exchange Act of 1934 from 500 to 2,000, provided that no more than 500 such holders are not accredited investors.
Finally, the bill would mandate that the SEC create a new class of securities exempt from the registration requirements of the Securities Act of 1933. This measure would effectively increase the size of Regulation A offerings to cover sales of up to $50 million of such securities by a company within any 12-month period, subject to the annual filing of audited financial statements and other conditions to be prescribed by the SEC, including periodic reporting requirements. Regulation A offerings, currently limited to sales of up to $5 million of securities in any 12-month period, are subject to fewer disclosure requirements than are offerings registered with the SEC.
Proponents of the legislation assert that it would reduce the "time to market" for emerging growth companies planning an IPO, particularly those that would not qualify as "smaller reporting companies" (smaller reporting companies are those with a public float of less than $75 million), and diminish some of the costs of IPOs, permitting these companies to use more of their new capital to grow their businesses. Critics have challenged the legislation, arguing that it would scale back investor protection and that investors could demand a premium to balance the reduced disclosure requirements.
While several Democratic Senators are likely to attempt to address the SEC Chairman's concerns through the amendment process on the Senate floor, the current expectation is that the House bill will pass the Senate largely, if not entirely, in its current form. Should the H.R. 3606 pass the Senate without change, it would go to the President for his signature. Should the Senate make changes to the House bill, the House would have to consider and pass the Senate amendment before a bill could become law, or convene a conference committee to reconcile the House and Senate versions of the bill. (Both the House and the Senate would have to pass any such conference report before a bill would go to the President.)