On September 16, the House of Representatives passed H.R. 5405 “Promoting Job Creation and Reducing Small Business Burdens Act.” The bill addresses a number of Jumpstart Our Business Startups Act (JOBS Act)-related matters, and is also intended to make technical corrections to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bill packaged 11 stand-alone bills, six of which had previously passed the House, into one piece of legislation. It is unclear if the bill will gain traction in the Senate before the completion of midterm elections this November. The full text of H.R. 5405 can be found here. Noteworthy sections of the bill from a corporate and securities perspective include the following:
Title III – Holding Company Registration Threshold Equalization Act
- This title would provide that the registration and registration termination thresholds under Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) provided for under the JOBS Act that currently apply to banks and bank holding companies would similarly apply to savings and loan holding companies.
- Generally, a bank or bank holding company becomes subject to the registration requirements of the Exchange Act if it has total assets exceeding $10 million and a class of equity securities (other than exempted securities) held of record by 2,000 or more persons, and such registration requirements terminate if the number of record holders is reduced to less than 1,200 persons.
Title IV – Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act
- This title would provide an exemption from registration with the Securities and Exchange Commission for persons effecting securities transactions solely in connection with the transfer of ownership of a specified smaller private company (regardless of whether such person acts on behalf of a seller or buyer) through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving, securities or assets of such smaller private company, if such person reasonably believes that upon consummation of any such transaction, the acquiring person will control such smaller private company (i.e., would have the power, directly or indirectly, to direct the management or policies of such smaller private company, whether through ownership of securities, by contract or otherwise).
- Under this title, generally, a smaller private company would be an issuer without any class of securities registered with the SEC and that, in the immediately preceding fiscal year, had either (i) earnings before interest, taxes, depreciation and amortization (EBITDA) of less than $25 million or (ii) gross revenues of less than $250 million.
- Under this title, a person would not be exempt from registration if such person (i) in connection with the control transaction receives, holds, transmits or has custody of the funds or securities to be exchanged by the parties to the transaction or (ii) engages on behalf of an issuer in a public offering of any class of securities that is registered, or is required to be registered, with the SEC.
Title V – Small Cap Liquidity Reform Act
- This title would create a five-year liquidity pilot program allowing an emerging growth company (EGC) with annual gross revenues of less than $750 million during its most recently completed fiscal year to elect to have its securities quoted using a minimum increment (i.e., “tick size”) of $0.05 or $0.10, instead of the standard penny.
- Under this title, the securities of a covered EGC would need to trade above $1.00 at the effective date to be eligible to be quoted at a minimum increment of $0.05 or $0.10. In addition, such securities would no longer be eligible if the average trading price for any 90-day period falls below $1.00.
- Proponents have argued that a penny tick size is too small for market makers to be sufficiently profitable in small cap stocks, resulting in them leaving the market, and that a larger tick size would encourage market makers to return to the market, improving trading activity for small cap issuers and, as a result, increasing liquidity for such small cap issuers such as EGCs covered by this title.
Title VI – Improving Access to Capital for Emerging Growth Companies Act
- This title would reduce the number of days an EGC must have a confidential registration statement on file with the SEC before its “road show” from 21 days to 15 days and would clarify certain financial disclosure requirements of Form S-1 as applicable to EGCs.
- This title would also provide for a one-year grace period for an issuer initially filing a registration statement as an EGC to complete its initial public offering, even though such issuer no longer qualifies as an EGC for purposes of the federal securities laws.
Title VII – Small Company Disclosure Simplification Act
- This title would exempt EGCs and other smaller companies from eXtensible Business Reporting Language requirements for financial statements and other financial information in periodic reports required to be filed with the SEC.
- Issuers qualifying as smaller companies eligible for the exemption provided for under this title would be those with total annual gross revenues of less than $250 million.
Title X – Disclosure Modernization and Simplification Act
- This title would require the SEC to issue regulations to permit an issuer to include a summary page in its annual report on Form 10-K, but only if each item in such summary is cross-referenced to the more detailed discussion in the Form 10-K. There is currently no provision in Form 10-K prohibiting an issuer from using such a summary.
- This title would also require the SEC to scale back or eliminate requirements of Regulation S-K to reduce the burden on EGCs, accelerated filers, smaller reporting companies and other smaller issuers, “while still providing all material information to investors.”
Title XI – Encouraging Employee Ownership Act
- This title would require the SEC to amend Rule 701 by increasing, from $5 million to $10 million, the amount of securities a company can sell in any 12-month period before the company is required to provide the following additional disclosures to investors: summaries of the plan(s) pursuant to which the offerings are made, information about the risks associated with investing in the securities sold pursuant to the plan(s) and financial statements.
Rule 701 under the Securities Act of 1933 (Securities Act) provides a safe harbor from registration under the Securities Act for grants of equity securities by a non-reporting company to its employees and certain other persons under a written compensatory benefit plan or written compensation contract.