On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act. The JOBS Act consists of a package of bills intended to make it easier for smaller companies to raise public and private capital in the U.S. financial markets. A general summary of the JOBS Act is available here.

The JOBS Act relieves “emerging growth companies” (EGCs) from certain compensation-related disclosure requirements under the Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934, as amended (the Exchange Act) and from certain rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). These provisions, which became effective immediately, significantly simplify the initial public offering (IPO) process and reduce disclosure burdens on certain recently-public companies. The JOBS Act also raises the registration thresholds under Section 12(g) of the Exchange Act.

IPO On-Ramp Provisions for Emerging Growth Companies

The JOBS Act exempts EGCs from certain compensation-related regulatory requirements and greatly simplifies compliance with others. An EGC is an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that had an IPO of its common equity after December 8, 2011. EGCs are exempt from the following requirements: 

• to hold nonbinding shareholder votes on “say-on-pay” and “say-on-frequency”; 


• to hold a nonbinding “say-on-golden parachutes” vote and to provide related disclosure; and 


• to provide disclosure with respect to pay ratios and pay versus performance (Dodd-Frank requirements that are not yet effective because the Securities and Exchange Commission (SEC) has not yet adopted implementing rules). 

EGCs are also permitted to comply with the simplified compensation-related disclosure requirements that apply to small business issuers (i.e., those issuers with a public float of less than $75 million) in lieu of complying with the more onerous requirements of Item 402 of Regulation S-K that apply to larger issuers. This permits: 

• disclosure of compensation of three named executive officers instead of five (i.e., the chief executive officer and the two other most highly compensated executive officers); 


• disclosure in the summary compensation table for the two most recently completed fiscal years instead of three years;
    
• omission of a compensation discussion and analysis; 


• omission of the Grants of Plan-Based Awards Table, Option Exercises and Stock Vested Table, Non-Qualified Deferred Compensation Table and Pension Benefits Table; and 


• omission of disclosure relating to the relationship between compensation and risk.  

An issuer will continue to be eligible for these simplified disclosure rules for as long as the issuer continues to qualify as an EGC. An issuer will continue to qualify as an EGC until the earliest of: 

• the last day of the fiscal year during which such issuer had total annual gross revenues of at least $1 billion; 


• the last day of the fiscal year following the fifth anniversary of the issuer’s IPO; 


• the date on which the issuer has issued, during the previous rolling three-year period, more than $1 billion in non-convertible debt; or 


• the date on which the issuer is considered to be a “large accelerated filer” under the Exchange Act (i.e., generally an issuer with a worldwide public float of $700 million or more).  

In addition, an issuer remains exempt from the requirement to hold a “say-on-pay” advisory vote until one to three years after it no longer qualifies as an EGC, determined as follows: 

• generally, a former EGC must hold a “say-on-pay” vote no later than one year after it ceases to be an EGC; 


• however, if a company was an EGC for less than two years after the company’s IPO, it is not required to hold a “say-on-pay” vote for three years after the IPO.  

Increase in Exchange Act Reporting Thresholds Means Greater Ability for Private Companies to Make Broad-Based Employee Equity Grants

The JOBS Act significantly reduces the potential for private companies to become subject to the reporting requirements under the Exchange Act in connection with equity grants to employees.

Prior to the relief provided under the JOBS Act, Section 12(g) of the Exchange Act required every issuer having total assets of more than $10 million and shares held of record by 500 or more persons to register under the Exchange Act. This requirement imposed a significant burden on large private companies wishing to grant equity awards to large numbers of employees and was particularly problematic for emerging technology companies and other private companies where equity awards are often widely disseminated among the employee ranks. Great care had to be taken to avoid inadvertently becoming subject to the registration and reporting requirements applicable to public companies under the Exchange Act.

Prior to the JOBS Act, issuers wishing to grant equity awards to employees that would result in the issuer having shares held of record by 500 or more persons had to either seek no-action relief from the SEC through an individual request or ensure that the equity awards complied with the various requirements set forth in a series of SEC no-action letters and, later, the requirements codified in Exchange Act Rule 12h-1(f). However, the relief provided by Exchange Act Rule 12h-1(f) applied only to options — relief relating to grants of other types of equity awards, including restricted stock units, was available only pursuant to company-specific no-action relief. Earlier this year the SEC granted exemptive relief from Section 12(g) registration that all companies may rely on to exclude restricted stock units meeting certain conditions set forth in the no-action letter from the shareholder of record count.

The JOBS Act significantly reduces the burden on private companies making broad-based equity grants as follows: 

• a private company is subject to public disclosure and registration requirements only if it has at least 2,000 shareholders of record or (in the case of companies other than banks and bank holding companies) at least 500 shareholders who are not accredited investors; and


• individuals who received shares under an employee compensation plan in a transaction exempted from the Securities Act registration requirements (for example, under the Rule 701 exemption) are not counted at all.  

From a practical perspective, the changes to Section 12(g) allow a private company to have a very large number of employees as shareholders without becoming subject to the Exchange Act reporting requirements.

Although this provision became effective immediately upon enactment, it requires the SEC to adopt safe harbor provisions that will allow issuers to determine whether holders of their securities received the securities pursuant to an employee compensation plan in a qualifying exempt transaction. There is no specified deadline for the SEC rulemaking. 

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