On April 5, 2012, President Obama signed the "Jumpstart Our Business Startups Act," otherwise known as the "JOBS Act." The JOBS Act was widely perceived as supporting job creation in an election year and passed both the House and Senate by substantial margins. The JOBS Act is designed to make capital more available to small and emerging growth companies and reduce regulatory burdens that normally follow capital formation.
General Solicitations to Accredited Investors in Rule 506 and Rule 144A Offerings
Section 201 of the JOBS Act requires the SEC to eliminate the prohibition on general solicitation and advertising in private offerings only to accredited investors under Rule 506 of Regulation D or non-issuer resales only to qualified institutional investors ("QIBs") under Rule 144A. The SEC is required to adopt rules by July 4, 2012, to implement these provisions, including defining the steps required to verify that purchasers are indeed "accredited."
Exemption from Broker-Dealer Registration for Regulation D Rule 506 Offering Platforms
To facilitate Rule 506 offerings, the JOBS Act exempts from 1934 Act broker-dealer registration a "platform or mechanism" that facilitates a general solicitation under Rule 506, including online solicitations, if the platform (i) receives no compensation in the offering, (ii) does not hold customer funds or securities in connection with the offering, and (iii) is not subject to statutory disqualifications. The platform can also assist in due diligence activities and invest in the offering.
Crowdfunding Portals for Exempt Offerings
The Act provides a new "crowdfunding" exemption from registration under the 1933 Act for offerings in an aggregate amount of not more than $1 million in any 12-month period (i) to investors with less than $100,000 in net worth or annual income, an amount up to the greater of $2,000 or 5% of annual income or net worth, and (ii) to investors with more than $100,000 in annual income or net worth, an amount up to 10% of annual income or net worth, if the offering is made through a qualified broker or "funding portal" intermediary. The intermediaries would be required to perform certain diligence activities of both the issuer and investors, ensure that certain disclosures are made, and oversee the escrow and release of funds. These and other qualifications for the intermediaries need to be clarified by SEC rules, but the SEC rules will include restrictions on investment recommendations, solicitations, compensation and holding investor funds or securities. The portals would need to register with the SEC but would be exempt from registration as broker-dealers. Issuers will be subject to disclosure requirements, including financial information certified by the principal executive officer for offerings of $100,000 or less, "reviewed" by an independent registered public accounting firm for offerings from $100,000 to $500,000, and audited for offerings over $500,000. Investors must be accorded "a reasonable opportunity to rescind" their commitments.
Although the crowdfunding exemption was added to the 1933 Act as of April 5, 2012, the SEC is required to adopt rules within 270 days to implement many features of the exemption, including the disclosure and filing obligations, disqualification criteria, funding for the portal registration requirement, and other transfer restrictions. Accordingly, as a practical matter the exemption may not be available until December 31, 2012, or an earlier date when the SEC adopts the implementing rules.
New Small Issue Exemption
The JOBS Act also requires the SEC to create a new small issue exemption that exempts securities issued in an amount not exceeding $50.0 million in any 12-month period. Currently Regulation A allows exempts offering up to $5.0 million in a 12-month period. The securities may be offered publicly and will not be restricted from subsequent public trading. The SEC rules will likely require the issuer to file an information statement prior to the offering and subsequent periodic filings. It is unclear how these filings would differ from either current Regulation A or typical registration statements and 1934 Act filings.
Threshold Raised for 1934 Act Registration; No Relief for Current Non-bank Reporting Issuers
The JOBS Act amends Section 12(g) of the 1934 Act to increase the threshold for mandatory 1934 Act registration from 500 holders of record to 2,000 holders, or 500 holders who are not accredited investors. The threshold $10.0 million asset requirement remains unchanged. Crowdfunding investors and employees receiving securities under employee compensation plans that are exempt from registration would be excluded from the calculation.
This change will give small companies significantly greater opportunity to raise capital without incurring the major expenses associated with public company reporting. This change will not benefit existing small 1934 Act reporting companies because the JOBS Act did not change the current requirement that an issuer must have fewer than 300 equity holders to deregister and cease reporting. Banks and bank holding companies, however, will be able to deregister if their holder count goes below 1,200.
Offerings by Emerging Growth Companies
An "emerging growth company" or "EGC," defined as a securities issuer with $1 billion or less in total annual gross revenues (subject to CPI indexing) that has not made a public offering of common equity securities on or before December 8, 2011, will find the IPO process somewhat more friendly. EGCs would be able to "test the waters" with institutional accredited investors and QIBs either before or following the filing of a registration statement. They may also conduct a quiet "non-public filing" with the SEC prior to a formal filing. Registration statements by EGCs would have reduced executive compensation disclosure, and would require two rather than three years of audited financial statements.
The SEC's Division of Corporation Finance has issued a temporary procedure for confidential submission of draft registration statements by EGCs. On April 10, 2012, the Division also published a "Frequently Asked Questions" release on the submission process, which is available here.
Reporting Requirements for Emerging Growth Companies
For five years after its IPO, as long as an EGC continues to qualify as an EGC, it would enjoy certain relaxed reporting requirements under the 1934 Act. It would not be required to disclose a comparison of executive compensation to its financial performance or to the compensation of all other employees. It would not be required to hold a shareholders advisory vote on executive compensation ("say on pay") or golden parachutes. It would not need to have an independent registered public accounting firm report on internal controls. Compliance with certain GAAP accounting pronouncements and other accounting rules would also be deferred.
Other Provisions, Regulatory Action and Effectiveness
The JOBS Act has a good many other provisions, including provisions related to (i) investment bank research reports in relation to offerings, (ii) definitional details relating to the provisions discussed above, (iii) regulation of FINRA and the stock exchanges, (iv) requiring SEC review of Regulation S-K (which sets forth the basic disclosure standards for filings under the 1933 Act and 1934 Act) and (v) SEC review of decimalization of securities sale pricing. Implementation of several of the various provisions of the Act will require SEC rulemaking, which could take months or longer.
The full text of the JOBS Act is available here.