Jobs Act Opens Up New Capital Raising Alternatives for Private Companies

by McNees Wallace & Nurick LLC
Contact

[author: Michael L. Hund]

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act, also known as the “Jobs Act.” The Jobs Act will effect dramatic changes in the law as it applies to companies seeking capital by way of private placement stock offerings, overturning certain restrictions that have been in place for decades. The Jobs Act also added a brand new concept, “crowdfunding”, to the array of choices for private placement offerings.

 

The overall intent of the Jobs Act, which was passed with broad bipartisan support, was to ease regulatory burdens on capital raising by smaller companies with the hope that such easing would lead to job creation and growth in the U.S. economy. In addition to opening up new capital-raising opportunities for small, privately held companies, the Jobs Act also added some fairly significant relief for companies that have recently gone public or that intend to go public in the future. There is a new category of companies identified under the Jobs Act known as “emerging growth companies,” a classification that most observers have deemed a misnomer since it includes companies with up to $1 billion in annual revenues, a size that includes a lot of older, established companies not normally thought of as being in the emerging growth phase. These emerging growth companies will now get a break on the path to public status through a process that is slightly more streamlined than the process encountered in the past. Additionally, once public, these companies will enjoy a five-year holiday from some of the more onerous disclosure and compliance provisions of the Dodd-Frank Act and the Sarbanes-Oxley Act, including a pass from the controversial auditor attestations on the internal controls of a company.

 

While the provisions relating to newly public companies are interesting and will surely be helpful to those companies, the provisions in the Jobs Act relating to private placement stock offerings are the more compelling and newsworthy parts of the new law. These new provisions will be especially important for companies planning to engage in a search for outside capital through the sale of shares of stock to investors. The two parts of the Jobs Act that give rise to this are the relaxation of the prohibition on general solicitations under Rule 506 of Regulation D, adopted under the Securities Act of 1933, and the implementation of the crowdfunding concept.

 

The Jobs Act mandates that the Securities and Exchange Commission (“SEC”) remove the long-standing ban on general solicitations for private placement offerings completed under Rule 506 of Regulation D. General solicitations include all attempts to sell shares except for offers made to a small, discrete group of persons who have some prior connection to the company making the offering. The removal of the ban on general solicitations is important because, both in terms of dollars raised and number of individual transactions, Rule 506 of Regulation D forms the basis for almost all private placements conducted by companies in the United States. Historically, offerings conducted under this rule were required to be structured to avoid making any widespread offering, i.e., a general solicitation. Now, under the Jobs Act, so long as all purchasers under such offerings qualify as “accredited investors”, there is no longer a prohibition on offers extended more widely, including those in which a general solicitation is made. Accredited status for individual investors is fairly easy to achieve and consists of any person with a net worth of at least $1 million (excluding personal residence) or $200,000 in annual income ($300,000 joint income with spouse), including a reasonable expectation that such income will continue into the current year. This new relaxation on general solicitations is significant because it allows companies to avoid the excruciating process of conducting private placement offerings that are indeed truly private in the sense of how they are conducted. Companies will still need to ensure that the actual purchasers are accredited investors, but a relaxation on the prohibition on general solicitations is likely to be deemed a significant benefit to companies conducting such an offering.

 

The second major capital formation change affecting private companies included in the Jobs Act is the introduction of the concept known as crowdfunding to the capital formation process. Used previously to harness the power of a crowd to solve a problem, the Jobs Act will allow private companies to raise small amounts of capital by selling shares of its stock by the use of this process. Crowdfunding offerings are limited as to size and must be done by way of numerous and significant requirements. For instance, a company is able to use this process to raise no more than $1 million in any 12-month period. The aggregate amount sold to any one single investor is based on the investor’s income. The investment limit is $2,000 or 5% of the investor’s income, whichever is greater, for investors with annual net income of up to $100,000. For investors with higher incomes, an investment of up to 10% of annual net income is permissible, with a cap of $100,000 per investment. Further, requirements will be put into effect by the SEC to require that crowdfunding offerings be conducted by a third-party intermediary rather than by the company raising capital. There will be specific disclosure requirements (including audited financial statements for most offerings) and subsequent financial and other reporting to be done by the company after completing the offering by the use of crowdfunding. The companies raising capital will generally be prohibited from advertising such offerings. Third-party intermediaries will need to be registered either as broker-dealers or as funding portals and will be required to engage in specific steps to make information available to investors, perform background checks on the principals of the company issuing securities, and collect and control the distribution of offering proceeds in the offering.

 

The SEC has up to 270 days from the April 5th effective date of the law to issue rules before the various new provisions concerning general solicitation relaxation and crowdfunding offerings will be allowed. Until then, the old rules and requirements remain in effect. Most observers believe that the SEC will be late in releasing the new rules because of the significance of the change in the landscape of private placements brought about by the Jobs Act. Once the rules are promulgated and these new paths for private placement offerings become available to issuers, it is anticipated that the relaxation on general solicitations for 506 offerings will likely prove to be helpful to many. It is hard to see how the crowdfunding alternative will be deemed particularly useful, however, given the extensive conditions for its use and considering that there are existing private placement offering alternatives already available for small offerings without nearly as many hurdles and impediments. On balance, it appears as though the new crowdfunding alternative is appealing because of its trendiness and creativity, but it probably has more political appeal than substantive merit. Some critics also fear that it will create new opportunities for fraud and deceit.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McNees Wallace & Nurick LLC | Attorney Advertising

Written by:

McNees Wallace & Nurick LLC
Contact
more
less

McNees Wallace & Nurick LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!