Update on Timeline for SEC Rulemaking to Implement the JOBS Act and Dodd-Frank Act

by Sheppard Mullin Richter & Hampton LLP
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In recent weeks, the SEC has given notice of matters that SEC Commissioners will consider at an open meeting on August 22, 2012, including:

  • general solicitation rulemaking required by Title II of the JOBS Act
  • disclosure and reporting rules for conflict minerals and resource extraction issuers that are required under the Dodd-Frank Wall Street Reform and Consumer Protection Act

SEC Chairman Mary Schapiro also recently testified before a House Oversight and Government Reform Committee about the SEC’s progress in implementing rules and providing studies and reports to Congress required under the Jumpstart Our Business Startups (JOBS) Act.

The JOBS Act (http://www.corporatesecuritieslawblog.com/capital-markets-president-obama-signs-jobs-act-landmark-reform-for-small-and-emerging-growth-companies-now-law.html), among other things, eases some of the regulatory burden for small businesses and startups to generate capital. Certain provisions of the JOBS Act became effectively immediately upon passage on April 5, 2012, while other provisions require additional SEC rulemaking in order to take effect.

In this blogpost, we provide a brief update on the status of implementation of the JOBS Act and the remaining corporate governance and compliance provisions of the Dodd-Frank Act.

Can I engage in general solicitation and advertising in connection with a private offering to accredited investors?

Not yet. Section 201(a) of the JOBS Act required the SEC, within 90 days of enactment of the JOBS Act, to revise the Rule 506 safe harbor from registration to allow general solicitation and general advertising for offers and sales of securities made under Rule 506, provided that all purchasers are accredited investors. The SEC was also required to revise Rule 144A, within 90 days of enactment of the JOBS Act, to provide that securities sold under Rule 144A may be offered to persons other than qualified institutional buyers (QIBs), including by means of general solicitation or advertising, provided that the securities are sold only to persons reasonably believed to be QIBs. The 90-day deadline expired on July 4, 2012, and the SEC has not yet adopted such revisions to Rule 506 or Rule 144A.

Chairman Shapiro noted in her testimony to Congress that the 90-day deadline did "not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input”. The SEC will consider rules to implement Section 201(a) on August 22, 2012. Typically, the SEC adopts proposed rules at the meeting at which they are considered.

What is the status of the crowdfunding provisions of the JOBS Act?

Title III of the JOBS Act provides a new exemption from the registration requirements of Section 5 of the Securities Act of 1933 for crowdfunding offerings. Crowdfunding involves the use of the internet and social media to raise capital, typically from a large number of people and in relatively small amounts per person. In May 2012, the SEC published responses to frequently asked questions related to the crowdfunding exemption which can be found here.

The JOBS Act requires the SEC to adopt crowdfunding rules within 270 days of enactment of the JOBS Act to implement the new crowdfunding exemption. Chairman Shapiro stated in her testimony to Congress that SEC staff in the Divisions of Corporations Finance and Trading and Markets are working closely together, along with the economists in the SEC's Division of Risk, Strategy, and Financial Innovation, to develop recommendations for the SEC. Chairman Shapiro did not indicate whether she expects the SEC to meet the 270-day deadline, which expires December 31, 2012.

What is the status of the JOBS Act IPO on-ramp provisions?

The IPO on-ramp provisions contained in Title I of the JOBS Act became effective immediately without SEC rulemaking. These provisions reduce regulatory burdens and disclosure requirements for qualifying “emerging growth companies” (EGCs). EGCs are companies with less than $1 billion in annual gross revenues and less than $700 million in publicly-traded shares that had their first registered sale of securities on or before December 8, 2011. For example, EGCs are allowed to “test the waters” by communicating with QIBS or institutional accredited investors prior to the sale of securities and they are allowed to submit their IPO registration statement on a confidential, non-public basis until closer to the time of the IPO "roadshow". In addition, EGCs may take advantage of scaled disclosure for both the IPO registration statement and subsequent filings required under the Securities Exchange Act of 1934 for up to 5 years following the IPO.

The SEC has taken the following steps to enhance the implementation of Title I thus far:

  • outlined procedures guiding EGCs through the draft registration submission process
  • developed a secure e-mail process for confidential nonpublic submissions of IPO registration statements
  • issued frequently asked questions regarding Title I

Is relief from the “500-shareholder” rule available yet?

Yes. Title V and Title VI of the JOBS Act amended Section 12(g) of the Securities Exchange Act of 1934 to raise the threshold for registration under the Exchange Act for companies and banks and bank holding companies from 500 securityholders of record to either 2,000 securityholders of record or 500 securityholders of record who are not accredited investors. Title V also excludes persons who received shares pursuant to employee compensatory plans in transactions exempt from registration under the Securities Act from counting against the number of holders of record. Shortly after enactment of the JOBS Act, the SEC posted guidance addressing expected questions related to Title V and Title VI. The JOBS Act requires the SEC to adopt safe harbor provisions that issuers can follow when determining whether holders of their securities received the securities pursuant to an employee compensation plan in transactions exempt from registration under the Securities Act. No deadline is given for these rules. The SEC’s posted guidance indicates that the required rulemaking does not affect the current availability of the JOBS Act amendments to Section 12(g). The SEC has not provided a target date for implementation of these regulations.

The JOBS Act also requires the SEC to report to Congress within 120 days after enactment on whether new enforcement tools are needed for the SEC to enforce the provisions of Rule 12g5-1 that disregard forms of holding securities that are used primarily to circumvent the registration provisions of Section 12(g). In her testimony to Congress, Chairman Shapiro stated that staff from the Division of Corporation Finance is working with staff from the Division of Risk, Strategy and Financial Information to review these provisions. Chairman Shapiro did not indicate whether she expects the SEC to meet the 120-day deadline, which expires August 3, 2012.

What disclosure rulemaking remains to be adopted under the Dodd-Frank Act? What is the timetable for adopting those rules? Is the required JOBS Act rulemaking taking priority of Dodd-Frank rule-making?

The SEC has yet to adopt the following disclosure rules required under the Dodd-Frank Act:  

Dodd-Frank Section

Description

Statutory Deadline

Status

953

Rules regarding disclosure of pay-for-performance and pay ratios

None

SEC actively working on it.  Acknowledges significant challenges given express requirements in statutory language. Prior projected timetable withdrawn.  Proposed bill in Congress to repeal Section 953.

 

954

Rules regarding recovery of executive compensation (clawbacks)

 

None

SEC actively working on it.  Prior projected timetable withdrawn.

955

Rules regarding disclosure of hedging by employees and directors

 

None

 

1502

Rules regarding disclosure related to "conflict minerals"

April 17, 2011

SEC proposed rules on December 15, 2010.  Conducted roundtable on October 18, 2011.  Commission to consider final rules on August 22, 2012.

 

1504

Rules regarding disclosure by resource extraction issuers

April 17, 2011

SEC proposed rules on December 15, 2010.  Commission to consider final rules on August 22, 2012.

At a talk given to the Society of Corporate Secretaries and Governance Professionals on July 14, 2012, Meredith Cross, Director of the SEC Division of Corporation Finance, stated that the SEC is working simultaneously on all of the required JOBS Act and Dodd-Frank Act required rules. She stated that the SEC did give priority to the Dodd-Frank provisions with statutory deadlines, but the SEC has not de-prioritized Dodd-Frank rulemaking without statutory deadlines in favor of the JOBS Act provisions with statutory deadlines. She did however indicate that capacity constraints must be expected to affect the speed at which any new rule-making can be completed.

What if you have questions?

For any questions or more information on these or any related matters, please contact any attorney in the firm’s corporate practice group. A list of such attorneys can be found by clicking Lawyers on this page.

John Tishler (858-720-8943, jtishler@sheppardmullin.com), Louis Lehot (650-815-2640, llehot@sheppardmullin.com), Edwin Astudillo (858-720-7468, eastudillo@sheppardmullin.com), Jason Schendel (650-815-2621, jschendel@sheppardmullin.com), and summer associate Irene Lu participated in drafting this posting.

 

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