On April 5, President Barack Obama signed the Jumpstart Our Business Startups Act, or “JOBS Act.” The JOBS Act is intended to make it easier for emerging businesses to gain access to capital. Some of the features of the legislation are listed below:
- Emerging Growth Companies (“EGC”) Defined: A company with total annual gross revenue of under $1,000,000,000 during its most recent completed fiscal year will be considered an “Emerging Growth Company” until:
- the last day of the fiscal year during which the company had total annual gross revenue of more than $1,000,000,000;
- the last day of the fiscal year following the fifth anniversary date of its public offering;
- the company issues more than $1,000,000,000 of non-convertible debt during a three year period; or
- the date upon which the company is deemed to be a “large accelerated filer.”
- EGCs Exempt from Shareholder Advisory Vote on Executive Compensation and Disclosure and Shareholder Approval of Golden Parachute Compensation: Section 102 of the JOBS Act relieves EGCs from having to satisfy these requirements. However if an EGC loses its emerging growth status within two years of its public offering, the company will have to meet these requirements by the third anniversary date of its public offering. For companies that lose their emerging growth status after two years, then those companies must comply during the fiscal year that they lose emerging growth status.
- Changes in Registration Statement Requirements for EGCs: EGCs will only have to provide two years of audited financials in connection with a registration statement. EGCs will also be able to submit draft registration statements confidentially to the Securities and Exchange Commission (“SEC”) for review. However, all confidential drafts and amendments must be filed at least twenty-one days prior to a road show. The JOBS Act also scales down other disclosures in registration statements as well.
- Changes in Sarbanes-Oxley Act Requirements: EGCs will not have to comply with the requirement for an auditor’s attestation regarding internal controls over financial reporting, as described in Section 404(b) of the Sarbanes-Oxley Act, until the company is no longer an EGC.
- Liberalization in Communications Regulations: The rules regarding broker and dealer published research reports are relaxed. Research reports are now allowed to be distributed by brokers and dealers on behalf of an EGC before filing a registration statement, even if those brokers and dealers plan to participate in the offering. Furthermore, EGCs, or those authorized by EGCs, may communicate with accredited investors or qualified institutional buyers to determine interest in the offering. Research reports may be distributed on behalf of EGCs during post-IPO quiet periods and lock-up periods.
- Changes to Rule 506 Offerings: The JOBS Act requires the SEC to issue rules that will allow general solicitation and advertisement in connection with Rule 506 offerings so long as all the purchasers of the securities offered are accredited investors.
- Crowdfunding: The JOBS Act creates a new class of exempt transactions, under Section 4(6) of the Securities Act of 1933, aimed at online capital raises. These transactions are subject to certain limitations and compliance concerns, such as restrictions on the size of the offering, the amounts sold to the individual investors, and filing of certain financial information with the SEC. For example, Section 4(6) offerings are limited to $1,000,000; intermediaries for online capital raises must register with the SEC; and issuers must provide certain information about the crowdfunding, including differing levels of financial data ranging from income tax returns to audited financial statements depending on the size of the offering.
- Change in Number of Shareholders that Triggers Registration: The shareholder threshold for triggering registration under the Securities Exchange Act of 1934 has been increased to 2,000 total shareholders or 500 shareholders that are unaccredited investors.
Prepared by:
Adams and Reese Securities Team