23 March 2018
On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act contains a number of significant modifications to the US securities laws; in particular, raising capital for both investment funds and operating companies will become easier, in part by relaxing the advertising methods that can be used to solicit capital. The JOBS Act also creates several new simplified methods to access public equity markets:
- an increase (from $5,000,000 to $50,000,000) in the amount of capital that can be raised using the simplified public offering mechanism known as Regulation A
- the creation of a new regulatory category of issuer (the “Emerging Growth Company” or “EGC”) that can be brought to the public markets without meeting several of the Securities and Exchange Commission’s (“SEC”) current accounting requirements.
Some elements of the JOBS Act can be relied upon immediately, while others require SEC rulemaking on an accelerated basis prior to taking full effect.
After more than a decade of increasing regulation of the manner in which companies and investment funds raise capital both publicly and privately in the US, the JOBS Act is a surprising breath of fresh air. While only time will tell whether it will ultimately generate jobs, the new law will clearly deliver some welcome regulatory relief, particularly to investment funds and small and growing companies that find themselves challenged by some of the strictures of the US securities laws.
Following is a sampling of the significant changes contained in the JOBS Act and a summary of their likely commercial impacts.
You Can Tell (Almost) Everyone About Your Offering
The JOBS Act now allows placements conducted under Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), to be conducted using general solicitation and advertising, as long as all purchasers in the offering meet the regulatory definition of “accredited investor”. This wholesale departure from the spirit of the “private placement” rules may significantly change the manner in which capital is raised in the US, and will almost certainly make it much easier for fund-raising to be accomplished. A similar expansion of the scope of marketing will also apply to the institutional capital markets for resales of securities (other than by the issuer) to “qualified institutional buyers” under Rule 144A of the Securities Act.
You Can Ask (Almost) Anyone For Money
The JOBS Act creates a pathway to widespread online fundraising for small offerings (so-called “crowdfunding”), subject to SEC regulations to be issued within 270 days of the enactment of the law. Specifically, a new category of regulated online forum, a “funding portal”, will be the principal vehicle for crowd-funded financings. Issuers using the crowdfunding mechanism can raise up to $1,000,000, without advertising the specific terms of the offering, but will be required to direct investors to a designated funding portal (or a broker-dealer who is managing the crowdfunding). In addition to specifying minimum disclosure requirements for crowd-funded offerings, the ability of investors to participate in crowd funding will be limited in any given year to investing (A) $2000 or 5% of the investor’s annual income or net worth, if either the investor’s annual income or net worth is less than $100,000 or (B) 10% of the investor’s annual income or net worth, not to exceed $100,000 in aggregate investments, if their annual income or net worth is greater than $100,000. Securities purchased in crowd-funding rounds must be held for one year except for limited circumstances.
Regulation A is Now Actually Useful
One of the most radical shifts in the JOBS Act is to raise the issuance threshold for “simplified” public offerings permitted under Regulation A of the Securities Act. Long one of the least useful means of accessing the public markets, fundraising pursuant to Regulation A was historically limited in any 12 month period to $5,000,000 in total capital. The JOBS Act raises the cap for Regulation A fundraising by ten times, to $50,000,000. It is too early to say with certainty where this development will lead, but one possibility can be considered by looking north towards Canada, where the Toronto Stock Exchange’s Venture Exchange regularly plays host to companies seeking well under $50,000,000 in equity pursuant to simplified registration procedures. The potential to build a robust US capital market for smaller companies, unhindered by the complexities of a “full” SEC registration, is compelling, particularly in sectors such as technology and natural resources where capital needs are intense and opportunities for small and medium-sized US businesses remain vibrant.
Facebook Might Not Have to Go Public, If it Does Not Want To
The JOBS Act raises from 500 to 2,000 the number of record holders of a class of equity securities that triggers a company’s registration requirements under the Securities Exchange Act of 1934 (the “Exchange Act”). Most famously, Facebook has been viewed as being “forced” to file for an IPO in order to avoid breaking the 500 holder rule; although only Facebook knows how many holders it actually has, presumably that company has a lot more breathing room before a registration is required.
Being a (New) Public Company Isn’t so Hard
The JOBS Act declares the existence of the “Emerging Growth Company” (“EGC”) category of public company – an issuer that had less than $1,000,000,000 in total annual gross revenues during its last completed fiscal year and that did not conduct its initial public offering on or before December 8, 2011. EGCs will benefit, in connection with IPOs and during a five-year post-IPO transitional period, from less-extensive financial reporting requirements and disclosure requirements relating to executive compensation. Furthermore, in a roll-back of the long-standing “gun jumping” rules that have limited discussions during the pre-IPO quiet period, an EGC and persons acting on its behalf will be permitted to communicate during registration with potential investors who are “qualified institutional buyers” or “institutional accredited investors” (as those terms are defined by the SEC). On a related note, an EGC will also be entitled to obtain confidential SEC review of its registration statement.
Investment Banks’ Research and Underwriting Roles are Redefined
Possibly the most surprising change in the JOBS Act is the decision to permit research analysts employed by investment banks to initiative research coverage of EGCs, and to communicate with an EGC’s management, under any circumstances without the participation of the bank’s legal department or investment bankers. This includes when the investment bank itself is participating in the EGC’s initial public offering as an underwriter.
The JOBS Act has the potential to revitalize private and public capital-raising in the US. While “crowd-funding” is interesting to consider and quite novel in the context of securities laws that focus on limiting, not expanding, the audience for capital raising, we believe that the new “limitless” advertising for Regulation D offerings to accredited investors, as well as the increased cap of $50,000,000 for fundraising pursuant to Regulation A, may ultimately prove to be the most notable elements of the new law. As the SEC promulgates the new rules under the JOBS Act, we look forward to having the opportunity to help companies and funds seeking to access both the private and public capital markets make the most of the opportunities created by this new legislation.