I. Background of JOBS act.
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “Act”) (H.R. 3606) into law. This bipartisan legislation is intended to stimulate jobs growth in the United States by allowing smaller companies to raise capital, both privately and publicly, with greater ease and fewer restrictions by relieving them of some of the regulations currently applicable to private offerings, initial public offerings, and certain newly public companies. This Act focuses on emerging growth companies, as defined, by allowing them flexibility as to the timing of entering the public offering market.
An “emerging growth company” (“EGC”), is defined in the Act as a business with less than $1 billion in revenue in its most recent fiscal year. This annual gross revenue amount is indexed for inflation every five years. Such businesses are exempt from certain costly regulatory and disclosure obligations under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934(Exchange Act). The Securities and Exchange Commission (SEC) is required to amend its applicable rules and regulations to comply with the provisions of the Act.
Emerging companies can maintain their status as EGCs until the earlier of:
– the last day of the first fiscal year after the company exceeds annual gross revenues of $1 billion
– the last day of the first fiscal year following the anniversary of its fifth year after going public
– the date the company will have issued more than $1 billion in non-convertible debt in the prior three years
– the date the company becomes a “large accelerated filer”, i.e., the last day of the fiscal year in which it has a public equity float, held by non-affiliates, of $700 million or more, and it has been a reporting company pursuant to the Exchange Act for at least 12 calendar months. A large accelerated filer is defined in section 240.12b-2 of title 17, Code of Federal Regulations.
The Act does not apply to emerging companies if the first sale of securities of such issuer occurred on or before December 8, 2011; for the most part, the EGC definition excludes existing small public companies, regardless of the number of years they have been public.
Pursuant to the Act, there is an increase in the thresholds required for registering under the Exchange Act from $1 million to $10 million in total assets, and from 500 to 2,000 holders of record of a class of securities, if no more than 500 holders of record are unaccredited, and disregarding for both thresholds individuals holding securities under an employee compensation plan.
EGCs will benefit from many procedural changes under the Act related to IPOs:
– a reduction in the financial information required; two years, rather than three, of audited financials, with no selected financial data for prior periods required
– pre-filing and post-filing communications to Qualified Institutional Buyers (QIBs) and Accredited Investors are allowed to determine interest on the part of such investors in the planned offering
– immediately after the EGC becomes public, investment banks will be permitted to publish research reports related to the company, without such research being considered an offer of securities
– the Securities and Exchange Commission (SEC) registration process may begin on a confidential basis
– various restrictions on communications between securities analysts and potential investors have been relaxed.
II. Crowdfunding
Crowdfunding is already a useful social platform fundraising tool, popularized by platforms like Kickstarter, Inc., which allows people to donate online to small causes and projects. Under the JOBS Act, small companies are provided with a broader range of methods of raising capital by crowdfunding.
Section 4 of the Securities Act is amended and the SEC is required to issue regulations to create an exemption from registrations that allows a private company to sell up to $1 million in securities to numerous investors, that are not accredited, over a 12 month period. However, the issuer is limited when selling to an individual investor. If either the investor’s annual income or net worth is less than $100,000, then the limit is $2,000 or 5 percent of the annual income or net worth of that investor, and if either the investor’s annual income or net worth is equal to or greater than $100,000, then the limit is 10 percent, not to exceed $100,000, of annual income or net worth of that investor.
Issuers, investors and intermediaries will be able to avail themselves of the new crowdfunding provisions only after a 270-day rule-making period, during which the SEC and an applicable self-regulatory organization (“SRO”) will issue rules pertaining to the operations of such funding pursuant to the Act.
III. Current Status of the JOBS Act
The SEC will oversee what is sure to be a booming market in crowdfunding for emerging businesses, and has until early next year to issue regulations determining who can buy and sell the stock and providing safeguards against fraud. The SEC is designed to protect investors, and therefore it’s expected to set a high bar for crowdfunding transactions online. However, the lobbyists have been at work since before the Act was even signed. Two new lobbying groups were recently created: the National Crowdfunding Association and the Crowdfunding Professional Association. They have been speaking at conferences, and will try to influence SEC officials to avoid too much bureaucracy, which they fear may hinder the new crowdfunding market.
[…] law on April 5, 2012. We presented an update on the regulatory implementation of the act here and here, as well as a discussion of the Act’s internal contradictions here. While much of […]