Within a month of the Initial Public Offering (“IPO”) Task Force’s white paper, “Rebuilding the IPO On-Ramp,” Congress developed the Jumpstart Our Business Startups (“JOBS”) Act. The legislation aims to create new companies, and ultimately new jobs. The JOBS Act loosens security regulations, making it easier for startups to access funding and go public. Professor Robert Bartlett recently spoke about the effects of the JOBS Act at a Berkeley Law Alumni Center event held at Orrick, Herrington & Sutcliffe LLP.
According to Professor Bartlett, an advisor to the task force, the JOBS Act makes five major changes to Federal securities law. First, the JOBS Act creates fewer regulatory reporting requirements for start-ups. Second, the Act eases the number of startups that must comply with the Securities Exchange Act of 1934 by increasing the number of shareholders required to trigger the ’34 Act. Third, the JOBS Act facilitates fundraising: start-ups can solicit accredited investors, rather than complying with the general solicitation ban or working through a broker. Fourth, it legalizes “crowdfunding”—though this form of fundraising still faces numerous restrictions. Lastly, it expands 3(b) exempt securities to include up to 50,000,000 shares to be issued in modified regulation A mini-public offerings. The JOBS Act also created a new category of company, the so-called emerging growth company (“EGC”), to take advantage of the new regulatory changes. This status is valid for five years or until the company’s annual gross revenue exceeds $1 billion.
Though the JOBS Act is a good start, there are still many implementation challenges. For example, the criteria for determining if a company has taken reasonable steps to verify that they are only selling to accredited investors is unclear. Further, there are no significant consequences for accidental violations. Additionally, though the purpose of the JOBS Act is to support job creation, many of the companies that have registered as EGCs are not emerging companies; rather, they are shell companies, acquisition companies, or subsidiaries of larger companies. Moreover, there are no metrics, objectives, or agencies employed to measure how many new companies or jobs are created in the wake of these regulatory changes.