Important new legislation intended to spur job creation and economic growth by improving access to the capital markets for start-up and emerging growth companies has cleared Congress. The “Jumpstart Our Business Startups Act” (JOBS Act) won final approval on March 27, 2012, and now goes to the President. The President is expected to sign the JOBS Act into law in the near future.
A summary of the JOBS Act’s most significant provisions is set forth below.
Most notably, the JOBS Act seeks to improve access to capital for companies that qualify as “emerging growth companies” (EGCs). This new category of recently public and soon-to-be-public companies includes any issuer that had total annual gross revenues of less than $1 billion (indexed for inflation) during its most recently completed fiscal year, other than an issuer that completed its initial public offering (IPO) on or before December 8, 2011. All companies that qualify as EGCs will have the option to pursue an IPO process that is intended to be more streamlined than the currently mandated process. EGCs will have up to five years following their IPO to achieve full compliance with certain disclosure regulations and accounting and auditing standards that are currently applicable to all US public companies. 1 Most of the EGC provisions of the JOBS Act will be effective upon enactment.
During this phase-in or “IPO on-ramp” period, an EGC will enjoy the following exemptions from, and modifications of, current disclosure requirements and accounting and auditing standards:
Under the JOBS Act, a company may choose to forgo any of the exemptions provided to EGCs under the JOBS Act and instead comply with the requirements that apply to an issuer that is not an EGC. An important limitation on this “opt-in” right, however, is that an EGC must choose whether it will avail itself of the exemption regarding the extension of time to comply with new and revised accounting standards at the time the company is first required to file a registration statement, periodic report or other report with the SEC. Furthermore, an EGC is not permitted to choose to comply with some but not all of the non-EGC accounting standards.
In addition to the IPO on-ramp, the JOBS Act directs the SEC to relax restrictions on private placements for all companies (regardless of whether they qualify for EGC status) and for other participants in private placements of securities.
Pursuant to a new exemption under Section 4 of the Securities Act, issuers will, without Securities Act registration, be able to publicly offer and sell up to $1 million of securities in “crowdfunding” transactions within a 12-month period, subject to the following restrictions:
A “funding portal” means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to the new crowdfunding provision, that does not (1) offer investment advice or recommendations, (2) solicit purchases, sales or offers to buy the securities offered or displayed on its website or portal, (3) compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal, (4) hold, manage, possess or otherwise handle investor funds or securities, or (5) engage in such other activities as the SEC, by rule, determines appropriate. Funding portals in crowdfunding transactions will not be required to register as broker-dealers so long as they remain subject to the authority of the SEC, are a member of a national securities association and meet certain requirements to be determined by the SEC.
The JOBS Act also preempts the authority of state securities commissions to require registration and establish offering requirements for securities issued pursuant to the new crowdfunding exemption.
Within 270 days of enactment, the SEC must issue rules implementing the new exemption and establishing bad actor disqualification provisions for both issuers and intermediaries.
Higher Shareholder Threshold for Exchange Act Registration
The JOBS Act amends Section 12(g) of the Exchange Act to increase the shareholder thresholds at which an issuer must register its securities with the SEC to either (1) 2,000 persons or (2) 500 persons who are not accredited investors. Also, securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the registration under the Securities Act shall not be considered to be held of record. Additionally, within 270 days of enactment of the JOBS Act, the SEC shall exempt, conditionally or unconditionally, securities acquired pursuant to crowdfunding transactions from the minimum shareholder threshold for Exchange Act registration of securities. Separate rules for Exchange Act registration will apply to bank holding companies.
Expansion of Regulation A
The JOBS Act amends and clarifies the SEC’s existing exemptive authority under Section 3(b) of the Securities Act, effectively modifying Regulation A (Conditional Small Issues Exemption) in several ways:
1 A company that is an EGC on the first day of its fiscal year will no longer qualify as an EGC upon the earliest of (1) the last day of the fiscal year during which it had total annual gross revenues of $1 billion (indexed for inflation), (2) the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities in a public offering, (3) the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt or (4) the date on which it is deemed to be a “large accelerated filer” pursuant to Rule 12b-2 under the Securities Exchange Act of 1934 (Exchange Act).
2 Every two years the SEC will be required to review the Regulation A offering size limitation and increase it as appropriate; if the SEC decides not to increase this amount, it must report to the Committee on Financial Services of the House and the Committee on Banking, Housing, and Urban Affairs of the Senate explaining the reasoning.
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