April 11, 2012
JUMPSTART OUR BUSINESS STARTUPS ACT OF 2012
SMALL-CAP PUBLIC COMPANY ALERT
Louis Taubman
Nekeifa Sylvester
Written with the intent to encourage funding of small businesses during the initial public offering process, the Jumpstart our Business Startups Act (the “JOBS Act”), as signed by President Obama on April 5, 2012, reduces the regulatory burden on small companies seeking to raise capital in the U.S. through revisions to the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). As a result, smaller issuers can now take advantage of improved opportunity for public funding and development during their initial years as a public company.
Pursuant to the JOBS Act, a small company seeking to do an initial public offering (“IPO”) with less than $1 billion in revenue during its prior fiscal year may qualify for Emerging Growth Company (“EGC”) status and may maintain status as an EGC for a period of up to 5 years . EGCs are excluded from the requirement of disclosing more than 2 years of audited financial statements in their initial public offering registration statement and are exempt from presenting certain financial data typically required in registration statements and reports filed with the SEC . Further, although EGCs should ensure proper financial recording and remain aware of updated accounting standards, issuers that qualify as an EGC will be exempt from new or revised financial accounting standards for a period of time.
Additionally, while the directors and officers of an EGC must maintain proper internal control procedures, another benefit of the new issuer category is the exemption from Section 404(b) of the Sarbanes Oxley Act of 2002 (“SOX”). Pursuant to this revision, EGC’s are not required to obtain the attestation of a public accounting firm with regard to management’s internal control assessments, thus, reducing the costs of auditing for EGCs .
The JOBS Act also makes several revisions to safe harbor for private offerings provided by Regulation D of the Securities Act. The JOBS Act modifies the requirements of Rule 506 of Regulation D and Rule 144A under the Securities Act, to allow issuers of securities in private offerings to use general solicitation and advertising to market securities to accredited investors and qualified institutional buyers . This revision permits small issuers to attract investors by use of advertising mediums, potentially including mass communication media such as the internet and newspapers.
In addition, the JOBS Act also introduces the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” (the “CROWDFUND Act”), which adds the CROWDFUNDING exemption under Section 4 of the Securities Act . The CROWDFUNDING exemption, added as Section 4(6) to the Securities Act, allows U.S. private issuers to raise up to 1 million dollars in capital per year from small investors without registration under the Securities Act . While sales pursuant to Section 4(6) are limited based on the investor’s net worth, annual income, require certain disclosures and are subject to a one year transfer restriction, they will also be exempt from registration requirements under section 12(g) of the Exchange Act .
Small issuers relying on Regulation A can now take advantage of new exemption Rule 3(b)(2), which greatly increases the consideration able to be received for equity and debt securities issued pursuant to this exemption from $5,000,000 to $50,000,000, subject to certain conditions necessary to protect investors. The expansion of Regulation A permits small issuers to potentially raise ten times the amount of capital previously allowed under Regulation A. While there are additional regulations for issuers relying on the new Regulation A, such as the requirement to file annual audited financial statements and the application of liability for material misleading offering documents under Section 12(a)(2), other benefits include the ability to solicit interest in the offering prior to filing an offering statement, electronically file offering statements, which was previously prohibited under Section 3(b) of Regulation A, and the application of Section 18 of the Securities Act, granting the securities federal preemption of select Blue Sky regulations.
Further, private issuers with total assets of $10,000,000 or more and up to a maximum of up to 2000 shareholders of record or 500 unaccredited investors holding any class of the issuer’s equity securities can now rely on exemptions to the requirement to register such class of securities pursuant to Section 12(g) of the Exchange Act. It is further amended to exclude those securities held by employees who received such securities under an executive compensation plan from the definition of “shareholders of record”.
Thus, the JOBS Act stands to benefit small and private issuers by reducing the regulatory burden such companies face and making fundraising less complicated. Based on the opportunities that the JOBS Act presents through decreased regulatory burdens, we anticipate an increase in IPO’s by small capital companies within the next few years. These changes could potentially provide a much needed boost to the small cap markets.
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