On March 27, 2012, the U.S. Congress passed the Jumpstart Our Business Startups Act, or "JOBS" Act, with strong bipartisan support. President Obama has indicated that he will sign the legislation. The JOBS Act seeks to increase job creation and economic growth by making it easier for funds and their portfolio companies to raise capital through private offerings of securities and for many portfolio companies to embark on initial public offerings.
General Solicitation by Private Fund Managers No Longer Prohibited
Of key importance to private fund managers engaging in fundraising, the JOBS Act directs the Securities and Exchange Commission ("SEC") to eliminate the prohibition on general solicitation and advertising applicable to private offerings of securities to "accredited investors" under Rule 506 of Regulation D under the U.S. Securities Act of 1933 (the "Securities Act"). Most private investment fund managers (as well as their nonpublic portfolio companies) rely on Rule 506 to offer securities that might otherwise be subject to SEC registration under the Securities Act. Currently to qualify for the Rule 506 exemption, managers cannot market fund interests using any form of general solicitation or advertising, which includes advertising in print or broadcast media, press releases and media interviews and even discussions in industry seminars or meetings when attendees are invited by a general solicitation. The JOBS Act directs the SEC to lift this restriction.
The JOBS Act specifies that offerings under Rule 506 will not be deemed public offerings under "federal securities laws" if the issuer engages in general solicitation or advertising so long as the only investors in such offerings are accredited investors. As a result, private fund managers should be able to engage in previously prohibited general solicitation and advertising when raising a fund. The SEC may specifically address the impact of the JOBS Act on private funds in subsequent rule making. Although most managers are unlikely to source private fund investors solely by advertising or press coverage, lifting current general solicitation restrictions will remove the legal uncertainty that information released to the press or on a manager's Web site during fundraising could jeopardize the availability of a Rule 506 exemption.
Because of the preemption of federal securities laws over state securities laws, the JOBS Act is not expected to affect the availability of state "blue sky" law registration exemptions for Rule 506 offerings. However, an issuer that does engage in general solicitation or advertising could lose the benefit of other potential state "blue sky" registration exemptions, which could be preferable to Rule 506 exemptions because of lower fees or no filing requirements.
In addition, it is unclear whether engaging in general solicitation or advertising within the United States could result in the loss of a foreign private adviser exemption from registration under the Investment Advisers Act of 1940. This exemption is available to foreign private advisers with no place of business in the United States, fewer than 15 clients in the United States and less than $25 million in aggregate assets under management attributable to U.S. clients. To claim this exemption, an adviser also cannot hold itself out to the public generally in the United States as an investment adviser. The SEC has construed advisers engaging in advertising or making information publicly available on the Internet (or even having their names in telephone books and building directories) as holding themselves out to the public. Absent further SEC guidance to the contrary, a non-U.S. fund manager would need to implement measures reasonably designed to prevent general solicitation or advertising from reaching the United States if it did not want to risk losing the availability of the foreign private adviser exemption.
Finally, the JOBS Act does not address the potential effect of general solicitation or advertising by an issuer when an offshore offering made under Regulation S under the Securities Act (which prohibits "directed selling efforts" into the United States) is conducted in conjunction with a Regulation D offering in the United States.
Other Private Offering Restrictions Eased
The JOBS Act raises the cap on exempt private offerings under Regulation A under the Securities Act from $5 million to $50 million. Unlike Regulation D offerings, Regulation A offerings need not be limited to accredited investors. Issuers seeking to rely on Regulation A would have to provide either tax returns or financial statements to prospective investors prior to investment. In addition, the JOBS Act creates a registration exemption for so-called "crowdfunding," where investors network and pool money, typically in very small individual contributions. The JOBS Act would permit individual crowdfunding pools of up to $1 million per year, with individual investors limited to the lesser of $100,000 and 10% of an investor's annual income, provided that individual investors with annual incomes or net worth less than $100,000 would be further limited to the greater of $2,000 and 5% of an investor's annual income or net worth.
More Difficult for Issuers to "Accidentally" Go Public
The JOBS Act also seeks to enable growing private companies to raise private capital without triggering the registration requirements under Section 12(g) of the U.S. Securities Exchange Act of 1934 (the "Exchange Act"). Previously, under Section 12(g), an issuer must register a class of securities under the Exchange Act and comply with the Exchange Act's public reporting requirements once such class is held of record by 500 or more shareholders and the issuer has assets in excess of $10 million. Many private companies and some private funds currently may restrict securities offerings for fear that a growing investor base will accidentally require them to "go public." The JOBS Act increases the threshold to 2,000 shareholders of record in total, or 500 shareholders of record who are not accredited investors. The JOBS Act also would exclude from the calculation (i) employees who obtained equity under employee compensation plans in reliance on exemptions from registration under the Securities Act and (ii) investors who purchased securities pursuant to the JOBS Act crowdfunding exemption.
Simpler for Emerging Growth Companies to Go Public
The JOBS Act amends the Securities Act and the Exchange Act to create a new category of issuers called "emerging growth companies," which could issue securities on public markets without initially facing the full rigors of SEC compliance. The JOBS Act creates a transitional process, or "on ramp," during which emerging growth companies that go public would benefit from scaled down disclosure requirements and transitional compliance burdens. The JOBS Act also includes provisions that would enable eligible companies to communicate more freely with institutional investors to determine their interest in a potential initial public offering ("IPO").
"Emerging growth companies" that could benefit from the JOBS Act include any issuer that, during its most recently completed fiscal year at the time of registration with the SEC, had less than $1 billion in annual gross revenues. Full compliance with the SEC's reporting requirements would be required after the earliest of (i) such time that the company generates $1 billion or more in annual revenues, becomes a "large accelerated filer" (at least 12 months of reporting history and $700 million in public float) or raises more than $1 billion in nonconvertible debt in the prior three years, and (ii) five years following the company's IPO. The legislation generally only provides benefits to companies that have not yet effected an IPO or have done so very recently.
Please contact your Proskauer relationship attorney if you would like more information on the JOBS Act or to discuss how the JOBS Act may impact your existing and future business.