MICHAEL BEST COMMENTS
On Thursday, March 8, 2012, the U.S. House of Representatives easily passed a package of bills called the Jumpstart Our Business Startups, or JOBS Act, aimed at making it easier for small businesses to go public, attract investors, and hire workers by reducing U.S. Securities and Exchange Commission (SEC) registration requirements and other restrictions. If it becomes law, the JOBS Act has the potential to significantly reduce the securities compliance costs of raising capital for emerging companies.
The Senate has introduced its own version of the JOBS Act and President Obama has indicated his support of the measure.
Increase of 500 Investor Threshold to be a Reporting Company
The JOBS Act increases the offering threshold for companies exempted from SEC registration from $5 million – the threshold set in the early 1990s – to $50 million. The measure also raises the threshold for mandatory registration under the Securities Exchange Act of 1934, as amended, from 500 shareholders to 1,000 shareholders for all companies (and 2,000 shareholders for all banks and bank holding companies) and excludes securities held by shareholders who received such securities under employee compensation plans from the calculation. Raising the offering and shareholder thresholds is intended to help small companies gain access to capital markets without the costs and delays associated with the full-scale securities registration process.
Also included in the legislation is a new registration exemption from the Securities Act of 1933, as amended, for securities issued through internet platforms also known as “crowdfunding.” To use this new exemption, the issuer’s offering cannot exceed $1 million, unless the issuer provides investors with audited financial statements, in which case the offering amount may not exceed $2 million. An individual’s investment must be equal to or less than the lesser of $10,000 or 10 percent of the investor’s annual income. By exempting such offerings from registration with the SEC and preempting state registration laws, the legislation seeks to enable entrepreneurs to more easily access capital from potential investors across the United States to grow their business and create jobs.
Removal of Ban on Small Company Advertisements to Solicit Capital
The legislation would remove the prohibition against general solicitation or advertising on sales of non-publicly traded securities, provided that all purchasers of the securities are accredited investors. The Securities Act of 1933, as amended, currently requires that any offer to sell securities either be registered with the SEC or meet an exemption. Rule 506 of Regulation D is an exemption that allows companies to raise capital as long as they do not market their securities through general solicitations or advertising. The legislation would allow small companies offering securities under Regulation D to utilize advertisements or solicitation to reach investors and obtain capital, provided that all purchasers of the securities are accredited investors. The goal is to allow companies greater access to accredited investors and to new sources of capital to grow and create jobs, without putting less sophisticated investors at risk.
Emerging Growth Companies
The legislation establishes a new category of security issuers, identified as “Emerging Growth Companies” (EGCs), which will be exempt from certain regulatory requirements until the earliest of three conditions: (1) five years from the date of the initial public offering; (2) the date an EGC has $1 billion in annual gross revenue; or (3) the date an EGC becomes what is defined by the SEC as a “large accelerated filer,” which is a company with a worldwide market value of outstanding voting and non-voting common equity held by non-affiliates (also known as “public float”) of $700 million or more. The regulatory relief provided by the legislation is designed to be temporary and transitional, encouraging small companies to go public but ensuring they transition to full conformity with regulations over time, or as they grow large enough to have the resources to sustain the type of compliance infrastructure associated with more mature enterprises.
NEW COMPLIANCE & DISCLOSURE INTERPRETATIONS
On February 13, 2012, the SEC released a new Q&A interpretation addressing how to properly describe advisory say-on-pay votes on proxy cards and voting instruction cards. According to the SEC, the following are examples of advisory vote descriptions that would be consistent with Rule 14a-21’s requirement for shareholders to be given an advisory vote to approve the compensation paid to a company’s named executive officers:
To approve the company’s executive compensation
Advisory approval of the company’s executive compensation
Advisory resolution to approve executive compensation
Advisory vote to approve named executive officer compensation
Simply saying “To hold an advisory vote on executive compensation” would not be consistent with Rule 14a-21 because shareholders could interpret this language as asking them to vote on whether or not the company should hold an advisory vote on executive compensation, rather than asking shareholders to actually approve, on an advisory basis, the compensation paid to the company’s named executive officers.