In April of 2012, President Obama signed into law the Jumpstart Our Businesses Startups Act (“JOBS Act”). This bipartisan legislation was designed to stimulate job growth by making it easier and less costly for smaller companies to raise capital in the United States by relaxing the regulations that apply to private offerings, initial public offerings and certain newly public companies. The Act was passed in the hopes it would facilitate capital formation by small private and emerging growth companies and stimulate job creation. The Securities and Exchange Commission (“SEC”) has been promulgating regulations to implement the Act for the last 18 months.
To help you navigate the new regulations and to further help you understand how they apply to your business, we are starting a series of blog posts with useful information, analysis and commentary on the JOBs Act, how it has played out over the last two years, and how it may affect you when you seek to raise capital. The series of articles will explore some of the significant practical considerations arising from the JOBS Act and how it may affect your business.
As an introduction, the JOBS Act includes a number of measures to facilitate capital formation for privately held businesses and emerging growth companies. The latter is a newly defined category of company under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Title I of the JOBS Act establishes a new category of issuer (i.e., company) called an emerging growth company (“EGC”). The Act provides these companies with easier access to the capital markets for initial public offerings (“IPO”) and affords them relaxed governance, disclosure and reporting requirements that are phased in over time following their IPOs.
Title II of the Act removes the prohibition against general solicitation and advertising for Rule 506 offerings – one of several exemptions from registration that issuers use to sell securities to the public without a full-blown registration – as long as all the purchasers in the offering are accredited investors.
Title II of the Act also requires the SEC to revise Rule 144A 144A – a rule used to exempt resales of U.S. and foreign securities from registration requirements – to permit the use of general solicitation and general advertising in sales and transfers of securities under that provision of the regulations.
Title III of the Act creates a new exemption under the Securities Act for crowd funding offerings. Prior enactment of the JOBS Act exemptions from registration were far too cumbersome to raise capital through crowd funding and unworkable due to the widespread use of the Internet. The Act amends Section 4 of the Securities Act to add a new provision that provides a crowd funding exemption from the regular (and costly) registration requirements that would otherwise apply to crowd funding financings.
Title IV Act amends the Securities Act to allow companies to conduct Regulation A-style offerings of up to $50,000,000, and requires the SEC to amend Regulation A or adopt new regulations to cover these offerings. The current Regulation A allows issuers to raise up to $5,000,000 through sales of their securities in interstate offerings without preparing a full-blown registration statement. It’s widely viewed as an unappealing capital-raising alternative because issuers must comply with state securities laws and are only allowed to raise a relatively modest amount of money in any 12-month period.
Titles V and VI of the JOBS Act amend Section 12(g) of the Exchange Act to increase the monetary and shareholder thresholds that trigger compliance with SEC reporting requirements for public companies.
Many of the provisions of the JOBS Act have required the SEC to undertake rulemakings that, in some cases, have provided the Commission broad authority to shape the utility of the JOBS Act. The Commission’s rulemaking process is well underway and the effect of those rules on the public and private markets is already being felt. Companies that wish to raise money in the current markets must stay abreast of the changing regulatory environment to determine how those changes affect their fund raising efforts, reporting requirements, and overall corporate governance.