President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) on April 5, 2012, making significant changes to U.S. federal securities laws and rules that govern the capital formation process in this country. Primarily, the purpose of the JOBS Act is to help ease the regulatory burden of capital raising for startups and smaller companies leading to increased economic growth and job creation.
While several of the JOBS Act provisions are effective immediately, many provisions require the Securities and Exchange Commission (the “SEC”) to conduct studies on certain key topics, and issue or amend implementing rules or regulations within the next 90 - 360 days. Consequently, the timing of some rule proposals is uncertain and the full impact of the JOBS Act will remain unknown until all rules and regulations are finalized.
Emerging Growth Companies
Effective immediately, the JOBS Act creates a new class of issuers, labeled “emerging growth companies,” that are exempt from certain federal securities regulations. An emerging growth company is one with less than $1 billion in total annual gross revenues during its most recently completed fiscal year. This status applies to companies with IPOs that occurred after December 8, 2011.
A company’s status as an emerging growth company terminates upon the earliest of:
the first fiscal year following the fifth anniversary of its IPO;
the first fiscal year after its annual gross revenues are $1 billion or more;
the date which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or the first fiscal year in which it is deemed to be a "large accelerated filer."
IPO On-ramp Provisions
An emerging growth company may take advantage of the JOBS Act’s easier and less expensive process of going public through "IPO on-ramp" provisions that exempt these companies from certain regulations. Once public, an emerging growth company will benefit from reduced regulatory requirements for up to five years or until its status as an emerging growth company is terminated. The IPO on-ramp provisions are effective immediately.
The IPO on-ramp provisions, for example, exempt emerging growth companies from certain federal securities laws regulations. These include the Dodd-Frank Act requirement to have advisory votes on executive compensation and Sarbanes-Oxley’s requirement to have an auditor’s attestation of internal controls and procedures.
Also, emerging growth companies will only need to provide two instead of three years of audited financials in their IPO registration statements and will be exempt from any future PCAOB rules regarding mandatory audit firm rotation or an expanded auditor report.
The JOBS Act also prohibits certain restrictions on research analysts reporting on emerging growth companies both before and after completion of the IPO. In addition, an emerging growth company may confidentially submit its registration statement to the SEC for review prior to officially filing with the SEC and may also "test the waters" before or after filing by engaging in oral or written communications with potential investors that are either qualified institutional buyers or accredited investors.
General Solicitation and General Advertising
Currently, issuers are prohibited under Rule 506 of Regulation D and Rule 144A under the Securities Act from engaging in general solicitation and advertising in private offerings. The JOBS Act requires the SEC to amend Regulation D to remove the prohibition as it applies to offerings under Rule 506. Also, the SEC will be required to amend Rule 144A to permit securities sold under Rule 144A to be offered to qualified institutional buyers. The SEC must make these revisions within 90 days after enactment.
These amendments will allow companies to engage in general solicitation and use general advertisements for private offerings made to accredited investors under Rule 506 and for private offerings made to qualified institutional investors under Rule 144A. However, companies must take reasonable steps to ensure the purchaser is either an accredited investor or qualified institutional buyer.
At this time, it appears that the easing of restrictions on general solicitation and advertising will be limited to Rule 506 and Rule 144A offerings and will not apply to Section 4(2) private offerings in general.
If you need assistance with any requirements under the JOBS Act or have any questions about this new legislation, the Armstrong Teasdale Corporate Services Group invites you to contact:
David W. Braswell / 314.621.5070 ext. 7651