Overview of the JOBS Act of 2012
On April 5, President Obama signed the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Passed with bipartisan support, the JOBS Act is designed to reduce the regulatory burdens associated with raising capital via public and private offerings of securities for emerging companies.
The JOBS Act creates a new class of issuer called an emerging growth company (EGC), which is defined as having total annual gross revenues of less than $1 billion during its most recently completed fiscal year. An EGC keeps that classification for five years after its initial public offering (IPO) unless certain other definitional benchmarks are met sooner. However, companies do not qualify for EGC status if they completed a sale of common stock in a registered public offering on or before Dec. 8, 2011.
Under the JOBS Act, EGCs are relieved of many of the burdens formerly associated with an IPO. For example, they may test the waters of an IPO by discussing it with individuals who qualify as accredited investors or qualified institutional buyers before the public offering is conducted. Companies should be careful in these communications, however, as some liability will still be attached. EGCs are also exempt from the auditor attestation requirements under Section 404 of Sarbanes-Oxley. An EGC may also file its initial registration statement drafts with the U.S. Securities and Exchange Commission on a confidential basis until the statement is declared effective, as long as the drafts are filed publicly within 21 days of conducting a road show presentation. Thus, companies can avoid any bad publicity that may result from not being able to finish an IPO. Companies can elect to opt out of the EGC exemptions.
The JOBS Act also increases the threshold for registration under the Securities Exchange Act of 1934 (the ‘34 Act) for private companies from 500 shareholders to 2,000, excluding employees who own shares under a compensation plan and shares issued in a crowdfunding transaction (see below), as long as there are no more than 499 unaccredited investors. The SEC has 270 days after enactment to adopt regulations implementing the new threshold requirements. Interestingly, unless the issuer is a bank or bank holding company, the 300-shareholder threshold for deregistration remains unchanged. Banks and bank holding companies may now deregister if they fall below 1,200 shareholders.
Additionally, the JOBS Act creates a new crowdfunding exemption for offerings of up to $1 million over a 12-month period, provided the issuer files a disclosure document with the SEC, uses a qualified broker/funding portal as a middle-man, and complies with certain individual investment limits based on that investor's income and net worth. The investors, however, do not have to qualify as accredited investors. This new offering mechanism will presumably pave the way for Web-based offerings for entrepreneurs who may otherwise have a difficult time finding capital through traditional loans. The SEC has 270 days after enactment to issue rules implementing the crowdfunding provisions. Until those rules are issued, this new exemption is unavailable.
Further, the JOBS Act requires the SEC to change the rules on general solicitation and advertising in connection with a private offering of securities under Rule 506 of Regulation D. Rule 506 exempts offerings of an unlimited amount to accredited investors and no more than 35 nonaccredited investors. Currently, issuers are prohibited from advertising these offerings to potential investors with whom they have no prior significant relationship. The JOBS Act removes this restriction as long as all of the purchasers of the securities are accredited investors. This means that issuers conducting these offerings could run ads in newspapers or online. The SEC has 90 days from enactment to issue regulations implementing this provision. In the meantime, companies should maintain the status quo and follow the existing rules prohibiting such general solicitation and advertising.
Finally, the JOBS Act asks the SEC to create an enhanced so-called mini public offering available under Regulation A of the Securities Act of 1933, raising the $5 million cap to $50 million, with a requirement that the issuer file certain periodic reports with the SEC.
This article simply summarizes some of the important provisions of the JOBS Act and should not be construed as legal advice. If you have specific questions, please contact your attorney or a member of the BrownWinick corporate and securities practice group.
Author: Leanna D. Whipple