On March 14, we summarized a package of bills called the Jumpstart Our Business Startups, or JOBS Act passed by the U.S. House of Representatives on March 8, 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. On March 22, the Senate approved the JOBS Act after adding an amendment that provides additional safeguards on “crowdfunding” to prevent credit scams. On March 27, the House passed the JOBS Act as amended by the Senate. It is anticipated that President Obama will quickly sign the bill into law.
What follows is a brief summary of the key provisions of the JOBS Act, as amended by the Senate.
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 2,000 shareholders, provided that fewer than 500 such holders are non-accredited investors, 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.” The aggregate amount sold to all investors in any 12-month period in reliance on this exemption cannot exceed $1 million. Investors with annual income or net worth of more than $100,000 can invest up to 10% of their annual income or net worth, not to exceed an aggregate of $100,000. Thresholds are scaled lower for investors with annual income or net worth of less than $100,000. The transaction must be conducted through an intermediary that is registered with the SEC as a “funding portal” or broker and registered with a self-regulatory authority. In addition, intermediaries must provide disclosures to investors regarding the level of risk of the offering and comply with other SEC regulations. Issuers must file with the SEC and provide to investors and intermediaries basic information about the issuer, including financial statements, its officers, directors, 20% shareholders and the risks related to the offering. Issuers requesting less than $100,000 are required to have the CEO of the issuer certify the accuracy of the issuer’s financials. Issuers seeking to rise between $100,000 and $500,000 are required to have a CPA certify the accuracy of the issuer’s financials. Issuers seeking to rise over $500,000 are required to make their audited financials public. The legislation implements a three-week listing-to-closure period, which allows some time for the collective “wisdom of the crowd” to identify possible fraudulent activity through feedback loops. 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.