The JOBS Act
The Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted on April 5, 2012. The JOBS Act seeks to increase the ability of companies to access capital in both the private and public markets by expanding the investor pool and the relaxation of regulatory restrictions. This bulletin highlights the JOBS Act’s primary provisions.
The JOBS Act eases the transition to public company status for an “emerging growth company” (EGC) that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. An EGC will retain its status as such until the earliest of (i) the fiscal year after it generates $1 billion in annual gross revenues, (ii) the fifth anniversary of its initial public offering (IPO), (iii) the date on which it has, during the previous three year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which it is deemed to be a “large accelerated filer” (at least 12 months of reporting history and $700 million in public float). A company is not eligible for EGC status if it conducted its initial public offering on or prior to December 8, 2011. Public reporting companies that have not completed an IPO may also qualify as an EGC.
Under the JOBS Act, an EGC may confidentially submit a draft registration statement to the Securities and Exchange Commission (SEC) prior to its IPO date; provided, however, that the initial confidential submission and any amendments thereto must be publicly filed with the SEC at least 21 days prior to conducting a road show. The confidential filing process affords companies the opportunity to assess whether moving forward with an IPO is in their best interest and preserves the confidentiality of the company’s financial statements and competitive information.
As long as a company maintains its status as an EGC, it also will be allowed (i) an exemption from the costly Sarbanes-Oxley Section 404(b) auditor attestation of internal controls and procedures, and from certain other accounting and auditing standards (including any auditor rotation requirements), (ii) expanded permissible communications with potential investors that are qualified institutional buyers or institutions that are accredited investors, (iii) reduced executive compensation disclosure requirements, and (iv) an exemption from say-on-pay votes, say-on-golden parachute votes, disclosure of pay-versus-performance and the ratio of CEO-to-worker pay compensation required by the Dodd-Frank Act.
The JOBS Act amends the thresholds for required registration under the Securities Exchange Act of 1934 to total assets of $10 million and a class of equity security held of record by either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. The JOBS Act further provides that an issuer that is a bank or bank holding company will not trigger the registration requirements until its total assets exceed $10 million and it has a class of equity security held of record by 2,000 persons. Employees who receive securities under employee compensation plans and holders of securities issued in crowdfunding transactions are specifically excluded for purposes of determining whether these registration thresholds have been met. Additionally, the threshold that permits deregistration for banks and bank holding companies has been increased from 300 persons to 1,200 persons.
General Solicitation and Advertising
The JOBS Act mandates that the SEC must, within 90 days after enactment, (i) amend Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) to provide that the prohibition against general solicitation or general advertising will not apply to offers and sales of securities made pursuant to Rule 506 if to accredited investors, and (ii) amend Rule 144A under the Securities Act to permit general solicitation and advertising in connection with the sale of securities to qualified institutional buyers. The JOBS Act requires issuers to take reasonable steps to confirm that each purchaser is an accredited investor or qualified institutional investor (as applicable) using such methods as determined by the SEC.
Capital Formation – Regulation A Offerings
The JOBS Act requires that the SEC create a new category of exempt securities under Regulation A of the Securities Act, provided that the aggregate offering amount of all securities offered and sold by the issuer within the prior 12-month period in reliance on such exemption does not exceed $50 million. Audited financials, and periodic disclosures to be mandated by the SEC, will be required.
“Crowdfunding” permits companies to raise capital from large networks of small investors, primarily through online platforms. The JOBS Act provides an exemption from the registration requirements of the Securities Act for crowdfunding transactions involving the offer or sale of securities by an issuer (including all entities controlled by or under common control with the issuer), provided that:
- the aggregate amount sold to all investors is not more than $1 million during the preceding 12-month period;
- the aggregate amount sold to any investor during the 12-month period preceding the date of such transaction, does not exceed (i) the greater of $2,000 or five percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000, and (ii) ten percent of the annual income or net worth of the investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; and,
- the transaction is conducted through a broker or funding portal that complies with the requirements of the Securities Act.
The issuer must provide information to investors and the relevant broker or funding portal, including, but not limited to: (i) income tax returns and financial statements certified by its principal executive officer for offerings of $100,000 or less, (ii) financial statements that have been reviewed by an independent public accountant for an offering between $100,000 and $500,000, and (iii) audited financial statement for offerings of $500,000 or more. Additionally, an issuer engaging in a crowdfunding transaction must also provide regular updates regarding the progress of the issuer in meeting the target offering amount and may not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker. During the one year period beginning on the date of purchase, securities issued in a crowdfunding transaction may only be transferred to the issuer, an accredited investor, a family member or the equivalent, in connection with the death or divorce of the purchaser or other similar circumstance, or as part of a registered offering. The SEC must establish rules that it deems necessary or appropriate with respect to the crowdfunding exemption within 270 days.
For more information, please contact Chase Cole, David Green or any member of Waller Lansden’s Corporate Governance practice at 800-487-6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.