On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act after it cleared Congress with strong bi-partisan support. The Act is intended to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies. The final bill includes the Senate's changes to the "crowdfunding" provisions of the House bill. Below are some of the relevant changes.
Easing Capital Formation for Private Companies
The JOBS Act contains a number of provisions designed to ease capital raising for private companies, including:
Increasing the maximum number of shareholders of record that a private company can have before it must register with the SEC as a public company from 500 to 2,000, so long as fewer than 500 are non-accredited investors, and excluding:
- shareholders who received employee compensation plan securities; and
- "crowdfunding" investors
Requiring the SEC to remove the prohibition on general solicitation or general advertising when conducting private placements under Rule 506 of Regulation D, thus allowing companies to advertise broadly when conducting private placements.
Permitting "crowdfunding" activities so that entrepreneurs could raise up to $1.0 million from a large pool of small investors, subject to limitations based on investor income levels. Issuers will be allowed to rely on investor certifications of income.
- Investors with annual income or net worth of less than $100,000 may invest no more than the greater of $2,000 or 5% of their annual income or net worth in any 12 month period in a given company, and those with annual income or net worth of more than $100,000 may invest up to 10% of their annual income or net worth annually (with at cap of $100,000 per investor, per company annually).
- The enacted JOBS Act includes a financial statement requirement:
- raising amounts up to $100,000 annually requires the certification of the principal financial officer that the financial statements are true and correct;
- amounts between $100,000 and $500,000 annually will require review by an independent public accountant; and
- amounts above $500,000 annually will require audited financial statements.
- Offerings will have to be conducted through a broker or a "funding portal" and:
- Issuers may not advertise the terms of the offering other than to direct investors to brokers or funding portals; and
- Issuers will be required to file with the SEC and provide to investors and intermediaries a range of information regarding the offering and the issuer (at least 21 days prior to the first sale to any investor and not less than annually thereafter).
- Securities issued will be "covered securities" and exempt from state Blue-Sky registration.
- Securities will be subject to transfer restrictions (with limited exceptions) for one year.
Raising the limit for offerings under Regulation A (the small offerings exemption) from $5 million to $50 million and exempting Regulation A offerings from state securities laws, so long as the securities are:
- Offered or sold over a national securities exchange, or
- Sold to a "qualified purchaser" – a term that will need to be defined by SEC rulemaking.
The revised Regulation A will require issuers to file audited financial statements annually with the SEC and the JOBS Act directs the SEC to develop rules relating to periodic disclosure by Regulation A issuers and to develop rules requiring an issuer to file and distribute to prospective investors an offering statement containing specified disclosures.
The timing relating to these provisions varies:
- changes to the number of shareholders of record are now effective;
- the SEC must make the changes to Rule 506 regarding general solicitation within 90 days (by July 4, 2012);
- the SEC must enact rules facilitating the crowdsourcing provisions within 270 days (by December 31, 2012); and
- changes to Regulation A will require SEC rulemaking, but no time limit is set by the JOBS Act.
The JOBS Act creates a category of issuer called an "emerging growth company", which is a company that has under $1.0 billion in annual revenue.
Such a company will remain an emerging growth company until the earliest of:
- 5 years after the IPO;
- It becomes a "large accelerated filer", i.e., an issuer with in excess of $700 million in unaffiliated public float;
- It has issued more than $1.0 billion in non-convertible debt in the previous three years, or
- It achieves $1.0 billion in annual revenue.
Under the JOBS Act emerging growth companies:
- Will be permitted to include only 2 years of audited financial statements (and 2 years of MD&A and selected financial information) in its IPO registration statement, and future filings would not need to go back any earlier;
- Will not be required to provide an auditor attestation of management's assessment of internal controls for financial reporting created under Sarbanes Oxley; and
- Will be exempt from certain accounting requirements, including the audit firm rotation and the supplemental information by audit firm requirements.
Research reports relating to emerging growth companies and research communications with investors and management will be easier:
- investments banks will be permitted to publish research during the pendency of a public offering, even if they act as underwriters;
- the research analyst conflict of interest rules related to marketing of IPOs and "three way" communication between research, investment banking and management will not apply;
- there will be no post pricing quiet period or booster shot restrictions on research reports or other communications; and
- emerging growth companies and their authorized representatives will be permitted to communicate orally or in writing with Qualified Institutional Buyers and Institutional Accredited Investors to determine interest in a potential offering whether before or after the filing of a registration statement for the offering.
IPO filings with the SEC by emerging growth companies can be made confidentially.
An emerging growth company will be exempt from shareholder approval requirements of executive compensation ("say on pay").
A company may only qualify as an emerging growth company if its first sale of common equity pursuant to an effective registration statement occurred after December 8, 2011.