On Thursday, April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which significantly amends federal securities laws and changes how private companies can raise capital in the private and public markets.
So, what is the JOBS Act and what’s in it? The short answer is the JOBS Act ties together six bills into one. Together, the Act has the following impact:
- Creates a new category of issuers called “emerging growth companies” (EGC) to encourage initial public offerings (IPOs). An EGC is defined by the Act as an issuer with annual gross revenues of less than $1 billion during its most recent fiscal year. The Act exempts EGCs from specific securities laws and disclosure requirements. Included below are the most significant changes.
- An exemption from the auditor’s attestation report on internal controls under Section 404(b) of the Sarbanes-Oxley Act of 2002. However, management’s assessment of internal controls under SOX Section 404(a) will still be required in the first annual report.
- Requirement of only two years (down from the three years previously required for companies that are not “smaller reporting companies”) of audited financial statements in the IPO registration statement and the requirement to cover only two years of financial information in the MD&A of Financial Condition and Results of Operations section of the IPO registration statement.
- An EGC will continue to be classified as such until the earliest of:
- The fiscal year following the fifth anniversary of its IPO;
- The date when it has issued more than $1 billion in non-convertible debt within the prior three year period; or
- The fiscal year in which it becomes a large accelerated filer (generally meaning it has over $700 million of public equity float and has been publicly reporting for at least one year).
- Raises the number of shareholders an issuer can have in a private offering before it is required to register with the SEC. The general threshold for required SEC registration has been raised from 500 shareholders to either 2,000 persons or 500 persons who are not accredited investors. The Act also excludes from this numerical threshold persons who received the equity securities pursuant to an employee compensation plan.
- Allows companies to sell up to $50 million in shares without registering with the SEC. Previously under Regulation A, the registration level was $5 million.
- Increases the shareholder threshold for SEC registration for financial institutions from 500 to 2,000 shareholders. It also increases the de-registration threshold from 300 to 1,200 shareholders.
- Permits entrepreneurs and microbusinesses to “crowd-fund” their companies. In other words, small businesses will be allowed raise money from large pools of small investors (usually done via the internet).
- Allows small businesses to use advertisements to solicit investors. Advertising and offering securities to the public without SEC registration was previously illegal.
While important provisions of the JOBS Act will go into effect immediately, the Act leaves the details related to crowd-funding and private offerings open for further clarification by the SEC.