On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act is intended to increase American job creation and stimulate economic growth by improving access to the public capital markets for a new category of issuer created by the JOBS Act — the “emerging growth company.” It represents the most comprehensive reform to the laws governing capital raising since the Securities and Exchange Commission (SEC) issued its 2005 Securities Offering Reform.
The JOBS Act:
- Creates a new class of company termed an “Emerging Growth Company” with an easier “on ramp” to going public by reducing existing regulatory requirements;
- Relaxes the advertising and solicitation requirements for private offerings of securities;
- Permits “crowdfunding” – the raising of capital from a number of investors via the internet and other social media;
- Increases from $5 million to $50 million the amount of capital that can be raised in a public offering without triggering registration and periodic reporting obligations; and
- Raises the maximum number of shareholders permitted for private companies from 500 to 2,000 (as long as no more than 500 are not accredited).
Emerging Growth Companies
By introducing a new category of publicly-held companies known as an “emerging growth companies,” the bill seeks to exempt businesses with under $1 billion in revenue from certain regulations associated with going public. Notably, companies governed under this category only need to produce two years of audited financial statements when filing for an IPO (rather than three years); they are exempted from Dodd-Frank rules giving shareholders a nonbinding vote on executive compensation; and are freed from the requirement of hiring an outside auditing firm to check internal financial controls.
General Solicitation and Advertising
Prior to the JOBS Act, no issuer could engage in any form of general solicitation or advertising with respect to the securities being offered. The JOBS Act directs the SEC to remove the prohibition against general solicitation and general advertising, provided that all of the purchasers of the securities so offered are accredited investors; to revise Rule 144A under the Securities Act to permit the use of general solicitation or general advertising, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe to be a qualified institutional buyer. The SEC must adopt these revisions within 90 days.
The JOBS Act allows companies to pool money from individuals with common interests and to issue shares in exchange for crowd-funded capital. The new registration exemption under the federal securities laws for crowdfunding will significantly expand funding capabilities for companies and ventures that are too small for traditional venture capital funding or companies that are unable to obtain such capital. The JOBS Act creates a new exemption to allow private companies to raise up to $1 million in equity capital from unaccredited investors within any 12-month period, with each investor being allowed to invest up to a certain amount. The Senate version of the JOBS Act creates a number of restrictions, aimed at protecting investors. Among those restrictions are limiting individual investments to $10,000 or 10 percent of the investor’s annual income (whichever is less) and registration by intermediary platforms and issuers with the SEC. Federal law would preempt state regulations, meaning that issuers could raise funds from across the United States. The SEC has 180 days after the bill’s enactment to publish rules for crowdfunding.
Small Issue Securities
Companies will be able to increase their public offerings of securities from $5 million to $50 million without triggering the full disclosure and reporting obligations that normally accompany a public offering of securities. The JOBS Act amends the offering threshold for companies that are exempt from SEC registration under Regulation A under the Securities Act by creating a new exemption from registration and reporting for small issue securities. These offerings will be subject to state blue sky laws unless they are offered or sold only to qualified purchasers (as determined by the SEC) or sold on a national securities exchange. Such issuers will be required to file annual audited financial statements with the SEC. In addition, the SEC will have the authority to require these issuers to make certain periodic non-financial disclosures available to investors. An issuer of these securities will be able to solicit interest in the offering before it files an offering statement, as determined under SEC rules, and securities issued in these offerings are freely transferable.