24 Sep Summary of JOBS Bill and Update
US House Passes “JOBS” Act to Help Small Businesses
On March 8, 2012, the US House of Representatives passed a wide-ranging bill to help smaller businesses known as the Jumpstart Our Business Startups Act (JOBS Act). The House passed the bill by a vote of 390-23. We have reviewed the bill and while some of its technical language still needs further study, this alert provides a summary of the bill’s seven key provisions:
1. There will be a new securities term called an “emerging growth company,” which is a company that had less than $1 billion in revenues before going public. The bill provides many new benefits for emerging growth companies. A company remains an emerging growth company until it has $1 billion in revenues or 5 years passes from going public. Emerging growth companies:
(a) will be exempt from the new “say on pay” rules requiring companies to give shareholders the right to a non-binding vote on executive compensation.
(b) will only have to deliver 2 years of audited financial statements for an initial public offering (IPO) instead of the 3 years many would be required to deliver now.
(c) will be exempt from Sarbanes-Oxley Section 404(b) which mandates engaging an outside auditing firm to opine as to the adequacy of internal financial controls.
(d) can conduct an IPO with research reports coming out immediately before and after during the previously dubbed “quiet periods.”
2. The bill ends the ban on general solicitation or advertising in Regulation D Rule 506 offerings, if all the purchasers in the offering are accredited investors.
3. The JOBS Act also authorizes so-called “crowdfunding.” If purchasers agree to hold securities for one year, the offering will be exempt from SEC registration, and you can offer stock to anyone, whether or not accredited, with no information delivery requirements. The idea is that this will lead to using the Internet and social media to offer securities. But the bill would limit companies to raising (a) $1,000,000 a year or (b) $2,000,000 if they provide investors with audited financial statements. Also no purchaser can invest more than $10,000 or if lesser, 10% of their annual income. The bill requires various warnings to investors and a filing with the SEC.
4. The bill further reforms SEC Regulation A in a fashion similar to a separate bill that previously passed the House. Regulation A allows a “mini” public offering with a downsized offering circular approved by the SEC. The bill raises the limit in a Reg A offering to $50 million, but does require audited financial statements. The Reg A offering would also be exempt from state securities or “blue sky law” if it is sold to “qualified purchasers,” a term to be defined in the future.
5. In order to mandate becoming an SEC reporting company, you now would have to have $10 million in assets and at least 2000 shareholders or 500 shareholders who are not accredited investors. Stock issued pursuant to an employee compensation plan would not be counted for this purpose.
6. Responding to a number of recent studies, the bill requires the SEC to study whether decimalization of how securities are quoted (ie now in penny increments vs. much higher in the past) has hurt IPOs and gives the SEC the authority to designate a minimum increment in pricing that is more than $0.01 but less than $0.10.
7. The bill also requires the SEC to review the key disclosure regime of Regulation S-K to see if its provisions can be “updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies.”