Apr 05, 2012
Authors: Craig D. Miller | Matthew S. O'Loughlin | Scott A. Schwartz
Today, April 5, 2012, President Obama signed into law the Jumpstart Our Business Start-ups Act (JOBS Act). This significant legislation substantially changes and liberalizes the landscape for both public and private companies seeking to raise capital. The following is a summary of the major components of the new law. While the Securities and Exchange Commission (SEC) will have the opportunity to shape the implementation of some of the provisions of the JOBS Act through rule and regulation, the JOBS Act will still stand as one of the most significant liberalizations of the securities laws in modern times.
The New Landscape for Emerging Growth Companies and IPOsTitle I of the JOBS Act creates regulatory relief for a new type of issuer—the so-called “emerging growth company” (EGC). An EGC is defined as any issuer with gross revenues of less than $1 billion during the prior fiscal year. Only companies that have gone public after December 8, 2011, are eligible to be considered EGCs.
EGCs are exempt from:
EGCs also benefit from the other portions of the securities laws applicable to smaller reporting companies, including less robust disclosure requirements than those for larger public companies. EGCs are also entitled to permit publication or distribution of research reports by brokers or dealers about the EGCs’ initial public offerings without such publications being deemed to be “sales” or “offers to sell” a security, even if the broker or dealer is participating in the registered offering.
In addition, an EGC may communicate with qualified institutional buyers or institutions that are accredited investors in order to determine interest in an IPO either before or after the filing of a registration statement, and an EGC may confidentially submit to the SEC a draft registration statement for confidential nonpublic review, as long as such filings are made no later than 21 days prior to the EGC’s first offering road show. This “testing of the market” proposition allows an EGC to both see if an IPO would be successful and obtain initial indications of interest of the potential pricing of an IPO.
An EGC retains its status as an EGC until the earliest of:
Liberalizing Communications in Private OfferingsTitle II of the JOBS Act relaxes the rules on general solicitation in connection with Rule 144A and Rule 506 of Regulation D offerings. Under current rules, issuers can offer securities in private placements to qualified purchasers and accredited investors without violating the Securities Act so long as, among other things, issuers do not resort to general solicitation of prospective purchasers of securities in their offerings.
The JOBS Act directs the SEC to revise its regulations to permit general solicitation or general advertising of Rule 506 offerings, provided that all the ultimate purchasers of the securities are accredited investors. Further, the SEC is directed to revise Rule 144A of the Securities Act to provide that securities sold under the revised exemption may be offered to persons other than qualified institutional buyers (QIBs) through general advertising and solicitation, as long as securities are sold only to parties that the issuer reasonably believes are QIBs. Persons conducting general solicitation or advertising in accordance with the new exemption are also excluded from having to register as a broker or dealer, subject to standard limitations, such as such person not receiving compensation in connection with the purchase or sale of the offered securities.
CrowdfundingTitle III of the JOBS Act is also known as the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act” or “crowdfunding” portion of the JOBS Act. Under the crowdfunding rules, transactions will be exempt from the provisions of the Securities Act if the following requirements are met:
The transaction must be conducted through a proper broker or funding portal.
Requirements to act as an intermediary in a crowdfunding transaction include:
Requirements for issuers who offer or sell crowdfunded securities include providing certain information in connection with the offering, including information surrounding an issuer’s business, insiders and the offering itself.
The issuer whose securities are offered and sold in a crowdfunding offering is also restricted from advertising the offering (other than to direct investors to the intermediary). We expect to see significant SEC regulation of funding portals and compensation of promoters for crowdfunding offerings when the SEC promulgates final crowdfunding regulations.
The JOBS Act also provides investors with express causes of action for material misstatements and omissions by issuers, similar to rights of investors arising in connection with statements in prospectuses for registered offerings.
Investors may not transfer securities purchased through crowdfunding for 12 months, other than to accredited investors or as part of a registered offering or to other standard exempted transferees.
Crowdfunding investors are also excluded from the shareholder cap under Section 12(g) of the Exchange Act, for filing under a registration statement pursuant to Section 12(b) of the Exchange Act.
Increasing the Permissible Size of Regulation A OfferingsTitle IV of the JOBS Act directs the SEC to add a new securities exemption for offers and sales of equity and debt securities of up to $50 million in a 12-month period. This so-called “Super Regulation A” exemption permits general solicitation of any type of investors, whether or not accredited, and provides that the securities issued in reliance on this exemption will not be considered restricted securities for purposes of transferability. The full scope of this exemption will not be clear until the SEC promulgates rules under Title IV, but we believe that the SEC will require a robust offering document to be filed with (and reviewed by) the SEC in advance of commencing an offering in reliance on this exemption, including audited financial statements. In addition, issuers relying on this exemption for the SEC will have an ongoing obligation to file audited financial statements with the SEC.
Increasing the Threshold for Public Company RegistrationTitle V and Title VI of the JOBS Act raise the threshold for required registration of issuers under the Exchange Act (and the corresponding obligation to file annual and quarterly reports with the SEC) from 500 shareholders to:
In addition, for purposes of determining whether or not a person is a shareholder of record, Title V specifically excludes securities held by any person who received such securities as part of his or her participation in an employee compensation plan, whereby the original issuance of those securities was otherwise exempt under the Securities Act.
In addition, Banks would be permitted to deregister under the Exchange Act as soon as they had fewer than 1,200 shareholders of record. Issuers other than Banks would still be subject to the requirement of having fewer than 300 shareholders of record prior to being permitted to deregister. The changes in requirements for registration or deregistration do not affect any of the exchanges, including Nasdaq and the New York Stock Exchange. Accordingly, issuers (including Banks) that want to list their securities on such exchanges or retain their listing on such exchanges will have to continue to be registered under the Exchange Act.
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The JOBS Act substantially liberalizes many aspects of the securities offering and registration process for companies. The law’s intent is that changes in the securities law will facilitate capital raising by companies and cause downstream growth in the job market and the economy generally. Manatt, Phelps & Phillips, LLP, stands ready to assist you in understanding the new law and to help you to take advantage of the opportunities the JOBS Act presents.
Blase P. DillinghamPartner
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