JOBS Act Relaxes Securities Registration, Solicitation and Reporting Requirements
of Small Businesses
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act), which increases the ability of companies to access capital without registration under the Securities Act and encourages initial public offerings of "emerging growth companies." This Alert focuses on specific portions of the JOBS Act that impact our clients' ability to raise capital in exempt offerings under the Securities Act, and describes the IPO On-Ramp for our clients interested in exploring an initial public offering.
Capital Raising in Exempt Offerings: Changes to Note
General Solicitations Permitted: Historically, general solicitation rules barred approaching potential investors without a pre-existing relationship between the company and investor, which limited the ability of companies to seek out potential investors. The JOBS Act now permits issuers to engage in general solicitations in connection with private offerings under Rules 144A and 506 of the Securities Act so long as investors are exclusively qualified institutional buyers or accredited investors, respectively. This change in solicitation rules should provide greater freedom to companies seeking out possible investors, and hopefully more capital.*
Approval of Crowdfunding: Perhaps the most widely publicized provisions of the JOBS Act deal with the approval of crowdfunding—the sale of securities typically through either a broker or an online sales portal registered with the SEC. The JOBS Act permits companies to raise up to
$1 million each year through sales of crowdfunding securities. Each crowdfunding investor may purchase up to $2,000 to $10,000 of crowdfunding securities each year, depending upon the annual income and net worth of each investor. The issuer must provide investors with certain financial and business information, depending upon the size of the crowdfunding offering. Crowdfunding offerings are not subject to the registration, documentation and offering requirements of state securities laws.*
Expansion of Exemption: The JOBS Act directs the SEC to increase the amount of securities that may be sold pursuant to an exempt offering under Regulation A of the Securities Act, from $5 million to $50 million in any one-year period, or adopt a new exemption that permits such offerings. Offerings under this exemption will remain subject to blue sky laws unless the securities in such offerings are sold on a national securities exchange or to qualified purchasers.*
Number of Shareholders: The JOBS Act increases the maximum number of shareholders that a private company may have without becoming subject to the reporting requirements of the Exchange Act—from 500 to 2,000—so long as no more than 499 shareholders are not accredited investors. Employees who receive securities as part of a compensation plan and investors that purchase crowdfunded securities will not be counted for purposes of calculating this number.**
Streamlined IPO On-Ramp and Phase-In Reporting Requirements
The JOBS Act streamlines the IPO process for "emerging growth companies"—companies with less than $1 billion in revenues in its last fiscal year, as follows:
SEC Registration: The JOBS Act permits emerging growth companies to submit registration statements confidentially to the SEC for review prior to public disclosure of such registration statements, and permits these companies to "test the waters" and communicate with qualified institutional buyers and institutional accredited investors before filing an IPO registration statement without violating "gun-jumping" restrictions on pre-offering communications to gauge the interest of such potential investors.***
Reduced Restrictions: The JOBS Act reduces restrictions on the publication of research and analyst reports by broker-dealers about an emerging growth company prior to an IPO, and the communications between analysts and companies prior to commencing an IPO. Only two, rather than three, years of audited financial information are required to be provided in the registration statement for the IPO.***
Phase-In Reporting: The JOBS Act permits emerging growth companies post-IPO to phase into certain accounting, audit and corporate governance rules and scaled-down disclosure rules for up to five years.***
* The changes in law related to general solicitations in Rule 506 offerings, crowdfunding and the increase in the exemption amount available under Regulation A will not be effective until the SEC enacts rules to implement the changes set forth in the JOBS Act.
** The increase in the number of shareholders of a company required to trigger the reporting requirements of the Exchange Act is effective immediately.
*** These provisions of the JOBS Act are effective immediately, and we expect the SEC to publish guidance soon on the confidential review process of registration statements to assist issuers contemplating going public.