In a rare showing of bi-partisanship on Capitol Hill, on April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law, making sweeping changes to federal laws regulating capital formation, and dramatically enhancing the ability of start-ups, emerging private businesses and public companies to raise money from the public. Some of these changes went into effect immediately – while others await the enactment of enabling rules by the SEC in 2012 and 2013.
The JOBS Act, which runs over 21 pages, will ultimately be supplemented with even more detail as and when the SEC implements regulations as mandated by Congress. The text of the Jobs Act can be accessed at www.govtrack.us/congress/bills/112/hr3606/text. The first round of regulations are expected to be promulgated by the SEC by July 2012, and may be accessed on the SEC’s website, www.sec.gov, when issued. In the meantime here are some of the highlights.
Raising Capital Without SEC Registration
Some of the changes made by the JOBS Act allow businesses to raise money more easily without having to register the offering with the SEC, thereby presumably providing easier access to capital markets at a reduced cost:
- Regulation D, an exemption from SEC registration for sales of securities, has been expanded to allow public and private companies to raise unlimited amounts of capital in unregistered offerings by using “general solicitation and general advertising” of potential investors, so long as all of the investors are “accredited investors.” Prior to this change, general solicitation and advertising by companies in unregistered offerings was generally prohibited, regardless of whether the company seeking funds was privately held or publicly traded. This change is effective 90 days from enactment of the JOBS Act.
- Crowdfunding – The JOBS Act directs the SEC to promulgate regulations within 270 days which will allow companies to raise up to $1 million per year from an unlimited number of investors who are not “accredited investors” without going through a cumbersome SEC registration process or complying with state “Blue Sky” laws. With the explosion of social media, the phenomenon of “crowdfunding” or “crowdsourcing” has emerged, with various non-profit organizations and start-up businesses seeking to raise funds over the Internet from small contributions by a large number of individuals. Prior to the JOBS Act, this type of fundraising would generally be illegal under federal and state securities law if the contributor received an interest in profits of a business, particularly where the fundraising was conducted through general solicitation on the Internet or involved a large number of contributors. Though the JOBS Act provides specific guidelines to meet this exemption, implementation awaits an extensive rulemaking process, which the JOBS Act requires the SEC to complete within 270 days. Until these rules are implemented, crowdfunding involving receipt of in interest in profits remains illegal under federal law.
Streamlining the IPO Process and Reducing Ongoing Public Reporting Obligations for “Emerging Growth Companies”
The JOBS Act has made changes to the Securities Act of 1933 which make it easier for private companies, to go public, by (1) changing rules relating to the going public process, and (2) reducing disclosure obligations of companies once they are public. The changes apply to a category of companies called “Emerging Growth Companies” (“EGC’s”), generally defined as companies with less than $ 1 billion in annual revenues. The EGC status terminates after five years, or sooner if certain enumerated events occur.
- Confidential Submission of Draft SEC Registration Statements – In the past, the IPO registration process commenced with the filing of a registration statement with the SEC, which became publicly available upon filing. Under the JOBS Act, an EGC conducting its initial public offering, may keep its registration statement as non-public information until 21 days prior to the IPO roadshow.
- Enhanced Communications with Investors – EGC’s and their agents are permitted to communicate with institutional accredited investors and qualified institutional buyers prior to filing a registration with the SEC in order to “test the waters” to ascertain interest in a proposed offering.
- Reduced Audited Financial Statements – EGC’s now have the option to provide two years of audited financial statements in their initial registration and subsequent SEC reports. Prior to the JOBS Act three years of audited financial statements were generally required.
- Internal Control Attestation – The JOBS Act exempts EGC from Section 404(b) of the Sarbanes-Oxley Act requiring annual attestation by the company’s auditors as to the effectiveness of internal controls. However, the attestation by management continues as a requirement.
- Streamlined Narrative Disclosure – EGC’s are relieved from complying with a number of otherwise mandatory non-financial statement disclosures in their IPO registration and subsequent SEC reports, including reduced disclosures relating to executive compensation mandated by the Dodd-Frank Act.
About the Author – Samuel S. Guzik is a corporate and securities attorney and business advisor admitted to practice before the SEC and in New York and California, with over 30 years of experience. During this time he has represented a number of public and privately held businesses, from startup to exit, concentrating in financing startups and emerging growth companies. For additional information regarding Mr. Guzik and his firm, Guzik & Associates, please visit his website at www.guziklaw.com.