Jumpstart Our Business Startups ("JOBS") Act

Last Updated April 17, 2012

President Obama signed the JOBS Act on April 5, 2012.  The law is intended to ease the way for small private company start ups, or "emerging growth companies" (EGCs) to raise public capital with a more limited set of securities disclosure and governance requirements. The Senate approved an amended bill March 22 on a 73 to 26 vote, and the House agreed to the Senate version of the bill, which originated in the House, on March 27 in a 390 to 23 vote. (See legislative history and final text.)

The SEC quickly said it would accept public comment on implementation of JOBS Act rulemaking, which Congress put on a fast track.

The SEC provided FAQs on Title I of the JOBS Act on April 16. Title I provides scaled disclosure provisions for emerging growth companies, including, among other things, two years of audited financial statements in the Securities Act registration statement for an initial public offering of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting. Title I also enables emerging growth companies to use test-the-waters communications with QIBs and institutional accredited investors and liberalizes the use of research reports on emerging growth companies.

Earlier, the SEC had provided interim procedures for confidential submission of an emerging growth company draft registration statements, along with associated FAQs.

SEC FAQs responses on Sections V and VI of the Act were provided April 11.  These sections involve increased threshholds for numbers of holders that trigger registration requirements.

Background

The bill, which moved rapidly through Congress, was passed first in the House with broad bipartisan support, but ran into more opposition in the Senate as some outside group became concerned about roll-backs to securities laws.

Part of the bill known as the "IPO on-ramp"  will allow companies with annual gross revenues of less than $1 billion in the most recent fiscal year to go through the IPO process: 1) with confidential SEC review of the draft registration statement (intended to protect companies prior to the road show; and if such company decides not to go forward, their draft statement is never made public); 2) providing two years of audited financial statements rather than three; 3) being allowed to communicate with accredited investors or qualified institutional buyers so one can "test the waters" and sell the deal before a registration statement is filed; and 4) with the benefit of reports from analysts who can publish before, during or after the IPO even if the analyst's firm is participating in the offering.


Governance rollbacks for the emerging growth companies under the JOBS Act include: 

  • No SOX 404(b) attestation required (small reporting companies already have a 3 year grace period).
  • No Say-on-Pay vote required for 3 years.
  • No pay-ratio or pay-for-performance disclosure under Dodd-Frank required.
  • No requirement to comply with mandatory audit firm rotation or auditor discussion and analysis (if enacted).
  • No requirement to comply with any future PCAOB rules unless the SEC mandates it as "in the public interest."

Private offering reforms include the allowance of general solicitation and advertising under Rules 506 and 144A if purchasers are accredited investors (individuals with $1 million net worth) or qualified institutional buyers.  The JOBS Act also will increase the amount of securities that can be issued under the Reg A private placement exemption from $5 million to $50 million.  For those companies wishing to stay private, the reporting threshold will change from 500 record holders to 2,000 record holders, not including shareholders with shares from employee compensation plans.  The determination of "record holders" will not be easy to ascertain.


Crowdfunding will be allowed under the JOBS Act under the following circumstances, which were put in place by the Senate amendment to the legislation, and approved by the House.  A company can raise up to $1million in 12 months through a registered broker dealer or crowdfunding portal (such as Kickstart.org, a charitable organization raising money online).  An individual investor can invest $2,000 or 5% of his or her annual income or net worth (if less than $100,000) or up to $100,000 or 10% of his or her annual income or net worth (if over $100,000). The company must disclose to investors a description of its business, financial statements, and capital structure.  After the funds are raised, a company must provide financial reports to investors and the SEC.


The JOBS Act provisions would apply to an EGC until its revenue exceeds $1 billion, 5 years following the IPO, when it has issued more than $1 billion in debt, or when it is deemed to be a "large accelerated filer," whichever is earlier.


Many regulators have expressed concern over what they perceive as reduction of investor protections, but advocates said rules on smaller companies had unduly inhibited access to public capital markets. 

 

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