In our recently published book, JOBS Act Quick Start (published by the International Financial Law Review), we provide readers with a context for understanding the significance of the Jumpstart Our Business Startups (JOBS) Act as both a recognition of the changes in capital markets over the last decade and catalyst for a broader dialogue regarding financing alternatives.
Posts Tagged ‘JOBS Act’
Nine months have passed since the Jumpstart Our Business Startups Act (the JOBS Act), a package of legislative measures intended to ease regulatory burdens on smaller companies and facilitate public and private capital formation, was signed into law. While certain portions of the JOBS Act have yet to be implemented pending SEC rulemaking, the provisions related to IPOs have been effective since enactment. These provisions seek to encourage companies with less than $1 billion in annual revenue to pursue an IPO by codifying a number of changes to the IPO process and establishing a transitional “on-ramp” that provides for scaled-down public disclosures for a new category of issuers termed emerging growth companies (EGCs).
Using nine-month data from the final prospectuses of 53 EGCs that successfully completed underwritten IPOs with gross proceeds of at least $75 million between April 5, 2012, and December 15, 2012, below is a summary of a number of developing market practices for EGC IPOs and certain related interpretative guidance issued by the staff of the U.S. Securities and Exchange Commission (Staff and SEC, respectively).
In our article, Redrawing the Public-Private Boundaries in Entrepreneurial Capital Raising, we examine what the JOBS Act (enacted earlier this year) tells us about the division between the public and private spheres in securities regulation. On its face the JOBS Act broadly expands the private realm as defined by our national securities laws. It provides two new exemptions from registration (crowdfunding and Regulation A+) and will broadly expand the reach of the most-used existing exemption from registration by removing the ban on general solicitation from exempt offerings made pursuant to Rule 506, provided they are made only to accredited investor. Yet legislative reform has done little to shore up the shaky foundation of existing theory that guides how we have thought about dividing public from private obligations in this area of the law. For the Securities Act of 1933 Act, the part of securities regulation that regulates the capital-raising, the changes spotlight a lingering identity crisis: Given the ever-expanding presence of Securities Exchange Act of 1934 Act regulation over the last half-century (e.g. integrated disclosure, shelf registration), is there any place left for the additional regulation traditionally provided by the ’33 Act?
On August 22, 2012, the SEC Division of Trading and Markets (the “Staff”) published answers to 14 frequently asked questions (“FAQs”) relating to certain provisions of Title I of the Jumpstart Our Business Startups Act, signed into law on April 5, 2012 (the “JOBS Act”), affecting research analyst and investment banking personnel conduct in connection with emerging growth companies (“EGCs”).
The most noteworthy guidance, in our view, relates to the following:
On April 5, 2012, the U.S. Congress enacted The Jumpstart Our Business Startups Act (the “JOBS Act”), a package of capital access reforms intended, among other things, to facilitate the ability of companies to raise capital in private offerings without registration with the Securities and Exchange Commission (the “SEC”). The JOBS Act directed the SEC to amend its rules to permit general solicitation or general advertising in connection with private offerings of securities under Rule 506 of Regulation D (“Rule 506”)  under the Securities Act of 1933 (the “Securities Act”) provided that that all purchasers of the securities are accredited investors (because either they fall within one of the categories of persons who are accredited investors or the issuer reasonably believes that they meet one of the categories at the time of sale) and the issuer had taken reasonable steps to verify that all purchasers of the securities are accredited investors. 
On August 29, 2012, the SEC proposed rules (the “Proposed Rules”) to implement these provisions of the JOBS Act.  The SEC seeks public comments on the Proposed Rules for 30 days following the date of their publication in the Federal Register. Following the review of comments by the SEC, the final rules will be issued. Since private investment funds typically rely on Rule 506 in connection with their fundraisings in the United States, we anticipate that the final rules, assuming that they are substantially similar to the Proposed Rules, will allow for greater flexibility in the United States fundraising process by relaxing existing regulatory requirements on publicity. This memorandum focuses on the aspects of the proposed changes to Rule 506 that are relevant for private investment funds.
The Commission considered a proposed rule mandated by the JOBS Act to eliminate the current prohibition against general solicitation and general advertising in certain securities offerings — particularly offerings conducted under Rule 506 of Regulation D.
Rule 506 is one of the exemptions that has been widely used by U.S. and foreign issuers to raise capital without registering their securities offerings.
In 2011, the estimated amount of capital raised in these types of exempt offerings was just over $1 trillion, which is comparable to the amount of capital raised in registered offerings during this same period.
These figures underscore the importance of these exemptions for companies seeking capital in the United States.
When the Commission adopted Rule 506 more than three decades ago, it said the issuer, or any person acting on its behalf, could use the exemption only if they were not offering or selling securities through general solicitation or general advertising.
In our article “Publicness” in Contemporary Securities Regulation after the JOBS Act, forthcoming in the Georgetown Law Journal, we focus on the ideologically-charged question of when a private enterprise should be forced to take on public status, an extraordinarily significant change in its legal obligations and freedom to maneuver. The JOBS Act, which became law in April 2012, makes the first change in almost a half century in the criteria specified for companies that must meet public obligations under the Securities Exchange Act of 1934. Congress increased the “private space” by raising the 500 shareholder threshold to 2000 (so long as no more than 499 of those are not “accredited investors”) and permitting most new IPO companies to skip a host of regulatory obligations during their first five years as a public company.
Yet the reforms were not the product of any coherent theory about the appropriate scope of securities regulation, not just because of the political dimension but because the public-private divide has long been an entirely under-theorized aspect of securities regulation. This is illustrated by the gross inconsistency in how the two main securities statutes—the Securities Exchange Act of 1934 and the Securities Act of 1933—approach this divide Putting aside the voluntary acts of listing on an exchange or making a registered public offering, Section 12(g) of the ’34 Act has, until 2012, simply counted assets and shareholders to determine companies subject to reporting and other obligations under the Act The ’33 Act, by contrast, uses investor wealth and sophistication, i.e., investor qualification.
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (“JOBS Act” or the “Act”) into law. While the Act and recent commentary have focused primarily on common equity issuances by “Emerging Growth Companies” (or “EGCs”), the JOBS Act also impacts companies that have issued only debt securities in registered transactions, typically pursuant to an “A/B” exchange for privately offered high-yield debt securities. Many of these companies subsequently become “voluntary filers” of SEC Exchange Act reports to comply with on-going debt covenants.
The attached chart summarizes how certain JOBS Act provisions apply to these debt-only issuers. As indicated in the chart, they may benefit from a number of JOBS Act provisions with regard to their Securities Act registration statements and Exchange Act reports, including:
- potentially indefinite EGC status, assuming the $1 billion revenue, $1 billion debt issuance every three years, and certain other thresholds are never crossed;
- the option to submit to the SEC confidential drafts of Securities Act registration statements for any offering prior to the issuer’s first sale of its common equity securities pursuant to an effective Securities Act registration statement;
- the option to comply with new accounting standards applicable to public companies on the schedule that is applicable to private issuers; and
- the option to provide scaled back executive compensation disclosure.
In addition, after the SEC adopts implementing rules, companies that issue debt securities privately will be permitted to engage in general solicitation and general advertising in connection with offerings made in reliance on Rule 506 of Regulation D and Rule 144A under the Securities Act, just as they will be able to do with respect to equity offerings.
On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”), which as we’ve previously noted represents a very significant loosening of restrictions around the IPO process and post-IPO reporting obligations. While most of the commentary on this legislation has thus far focused on its impact on capital markets matters, there are implications for private company mergers and acquisitions as well.
Late-stage private companies contemplating an M&A or IPO exit often undertake so-called “dual-track” processes in which they simultaneously file an IPO registration statement with the SEC and hold discussions with prospective acquirors. The IPO side of the process effectively becomes a stalking horse for M&A discussions and tends to force the hand of prospective acquirors that might otherwise not move as quickly as the target would like. The publicly filed registration statement both attracts attention and provides prospective acquirors with a sort of first-stage diligence that theoretically helps encourage bids.
Under the JOBS Act, emerging growth companies or “EGCs” will now have the ability to file their registration statements confidentially, so long as the confidential filings are ultimately released at least 21 days before the road show. Whether confidential filings will become the norm remains to be seen; there are a number of reasons why an IPO candidate might want to continue to use the traditional public filing process, including the publicity, customer and employee-related benefits of having a highly visible registration statement. For many companies, however, these benefits will be outweighed by the competitive advantages of keeping early filings confidential. The optionality that confidential filings create may be hard to resist: A confidential filer can now pull its deal without the stigma associated with withdrawing a publicly filed registration statement.
It is an honor for me to participate in the Public Company Oversight Board’s public meeting to discuss proposals to enhance auditor independence, objectivity and professional skepticism, including the potential of imposing rules setting a maximum term limit for audit relationships. Sadly, many people in official Washington seem prepared to jettison the interests of investors without reason as would occur in the proposed JOBS legislation, which as currently written would unnecessarily savage important barriers against fraud and manipulation of markets. We should never be afraid to experiment with opportunities for reducing unnecessary regulatory costs, particularly for smaller companies. At the same time, we shouldn’t let anyone’s financial agenda be a pretext for allowing the unscrupulous a free rein to abuse savers and investors. In its current form this legislation has too many elements that are simply fantasies, such as that a company with $1 billion in revenue is a “small business”, when that is 10-20X too high a threshold.
When Jim Doty and I were at the SEC, the Commission created an entire set of registration statements and ’34 Act filings (eg, Form 10-KSB) geared for small companies to lower their costs in raising capital or being public companies. Companies could elect the simpler forms if they wished, although they might pay a market penalty for providing less information. We allowed things like requiring two years of audited financials rather than 3 years, and three years rather than five years of selected financial data. We simplified disclosure requirements for smaller firms with less than $25mm in revenue (about $41mm in today’s dollars), but nobody got a free pass for fraud and there was still transparency for investors in current results.