VB CLIENT ADVISORY - JOBS ACT
THE JUMPSTART OUR BUSINESS STARTUPS (JOBS ACT – EASING THE WAY FOR RAISING PRIVATE AND PUBLIC CAPITAL
After much discussion and anticipation, on April 5, 2012, President Obama signed H.R. 3606, the Jumpstart our Business Startups (JOBS) Act (the “Act”), into law. As yet another change to capital markets and the regulation securities, the Act is intended to help start-ups and emerging companies gain access to U.S. capital markets by relaxing regulatory compliance and easing capital formation. The Act creates a new class of issuer, the “emerging growth company,” which provides a smooth on-ramp for the IPO process. The law also eliminates the long standing prohibition on general solicitation or advertising for private offerings of securities to accredited investors and creates a new exemption known as “crowdfunding.”
This Client Update provides a summary of the key features of the Act.
Streamlined IPO – Emerging Growth Company
Generally referred to as the “IPO On-Ramp,” Title I of the Act amends the Securities Act of 1933, as amended (“Securities Act”), and the Securities Exchange Act of 1934, as amended (“Exchange Act”) to create a new category of issuer referred to as the “emerging growth company.” An “emerging growth company” is defined as an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year. Excluded from this category are companies that sold common equity securities pursuant to an effective registration statement prior to December 8, 2011. The creation of this new category of issuers is intended to eliminate, or at least significantly reduce, the current impediments faced by smaller companies during the public offering and reporting process.
If a company qualifies as an emerging growth company, it will continue to maintain that status until:
It has $1 billion or more of gross revenue in any fiscal year;
The last day of the fifth year after its initial public offering;
The date on which it becomes a “large accelerated filer” under the Exchange Act; or
It has issued more than $1 billion of nonconvertible debt during any three year period.
By qualifying as an emerging growth company, the Act provides certain exemptions and significantly reduced regulatory obligations,including:
- Exemption from compliance with Section 404(b) of the Sarbanes-Oxley Act, which requires companies retain an outside auditor to attest to the company’s internal control over financial reporting;
- Research analysts are permitted to publish reports prior to and immediately after an IPO, even if the analyst works for a bank that is participating in the underwriting of the offering;
- Allowing emerging growth companies to “test the waters” by inquire about the interest of a qualified institutional buyer or an institution that is an accredited investor prior to the filing of a registration statement;
- Reducing the period for which audited financial statements are required in registration statements and periodic reports to two years (from three), and reducing the period for which selected financial information must be provided to the same period (from five years to two years);
- Exempt from any new or revised accounting standards until those standards are applicable to private companies;
- Confidentially submit to the SEC a draft registration statement for confidential nonpublic review by the staff, provided that the initial confidential submission is publicly filed at least 21 days before the date on which the issuer conducts a road show; and
- Exemption from the “say on pay,” “say on when,” “golden parachute approval,” and “pay versus performance” requirements for proxy statements under Section 14A(e) and Section 14(i) of the Exchange Act.
General Solicitation and Advertising
Title II of the Act requires the SEC to revise its rules within 90 days after the Act is signed to remove the prohibition on general solicitation and advertising for private offerings made under Rule 506, provided that all of the purchasers of securities are accredited investors. The issuers must take reasonable steps, using methods determined by the SEC, to confirm that the offering is only made to accredited investors. Conceivably, this means that subject to the anti-fraud provisions companies would be permitted to provide notice of accredited investor only offerings (under Rule 506) via websites, print media, social media and television.
Consistent with this new offering platform, the Act exempts from the broker-dealer registration requirements of the Exchange Act, third parties that operate websites or other media that facilitate the offer, sale, negotiation or advertisement of Rule 506 offerings, or that provide ancillary services such as due diligence or standardized documentation. This new exemption from the broker-dealer registration is conditions on the third party: (i) not receiving any compensation in connection with the purchase or sale of the securities; (ii) not holding investor funds or securities in connection with the transaction; and (iii) not being subject to statutory disqualification based on prior bad acts. General solicitation and advertising restrictions would continue to apply in the context of traditional private offerings made without reliance on Rule 506 of Regulation D.
Like a Rule 506 offering, the Act also requires the SEC to revise Rule 144A under the Securities Act, within 90 days of enactment of the Act, to provide that securities sold pursuant to Rule 144A may be offered to persons other than qualified institutional buyers, including by way of general solicitation or advertising, provided that sales of the securities are only made to persons the seller reasonably believes to be qualified institutional buyers.
The Act requires the SEC, within 270 days from approval of the Act, to create a new exemption called “crowdfunding” for small, non-public companies who seek to raise capital in small amounts through the offer and sale of securities to a large group of people, usually through use of the Internet or social media.
The “crowdfunding” exemption is available, provided:
- The total amount of securities sold in any 12-month period do not exceed $1 million;
- The total amount sold to any investor during any 12-month period does not exceed:
- The greater of $2,000 or 5% of the investor’s annual income or net worth (if the investors with an annual income or net worth of less than $100,000); or
- 10% of the investor’s annual income or net worth, capped at $100,000 (if the investor’s annual income or net worth is $100,000 or greater).
- The transaction is conducted through a broker or a “funding portal” that meets certain conditions, including that the intermediary:
- Registers with the SEC and any applicable self-regulatory organization as a broker of funding portal;
- Does not offer investment advice or recommendations, solicit purchases, sales or offers to buy securities offered or displayed on its website or portal, or compensate employees or others for such solicitation or based on sales of securities;
- Provides disclosures related to risks and investor education, among other things, as the SEC will determine to be appropriate; and
- Take measures to reduce the risk of fraud, as established by the SEC.
- The issuer make certain information about the issuer available to investors and the intermediary; and
- Restrict the transfer of securities sold under the exemption for 1 year (unless the securities are resold to the issuer, an accredited investor, or as part of a registered offering).
The Act provides purchasers in a crowdfunding transaction the right to sue the issuers for rescission if the issuer makes an untrue statement of material fact or omits to state a material fact. For liability purposes, “issuer” includes directors or partners of an issuer, the principal executive officer, principal financial officer, controller and principal accounting officer, as well as any person who offers or sells the securities in the offering.
It is important to note that the exemption does not apply to foreign issuers, investment companies or companies that are already reporting under the Exchange Act. In addition, companies that are subject to a “bad actor” disqualification will not be able to rely on the exemption.
In an effort to make Regulation A more appealing, the Act directs the SEC to create a new exemption to increase the offering amount and limit the regulatory restrictions, but does not specify a time limit in which such changes are to be completed. The current Regulation A provides an exemption from registration for offerings for an aggregate of $5 million of securities offered and sold publicly by an issuer during any 12-month period. The new regulation or amendment will increase the exemption amount from $5 million to $50 million in equity, debt, or convertible securities in any 12-month period. The issuer would be permitted to sell unrestricted securities to any potential purchaser by means of a general solicitation; however, issuers will be subject to investor protection rules, determined later by the SEC, including providing offering documents (e.g., prospectus like documents) and periodic disclosures with the SEC.
Currently, any company with more than $10 million in assets and 500 or more holders of record of any class of equity securities is required to register such securities under Section 12(g) of the Exchange Act and become subject to period reporting requirements. The Act increases the shareholder threshold by increasing the number of holders of a class of equity security to (i) 2,000 shareholders of record, or (ii) 500 shareholders who are not accredited investors. The Act also creates a new threshold for a bank or bank holding company to 2,000 holders of record, but does not have the additional 500 non-accredited investor threshold. In addition, shareholders who acquire their shares through exempt transactions under an employee compensation plan or the “crowdfunding” exemption are not counted for purposes of the shareholder threshold. The SEC is left with the task, which must be completed within 270 days after the adoption of the Act, of adopting regulations defining how the issuer will police and track the various securities and transactions intertwined within the threshold exemption.
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If have any question regarding this client update or if you would like to discuss options for raising capital for your business, please contact attorneys Sean S. Varner or Nathan W. Heyde in the firm’s Corporate Finance practice group.
This client update has been presented by Varner Brandt LLP for informational purposes only and does not constitute legal advice.