JOBS Act Will Significantly Relax Restrictions on Capital Raising April 6, 2012

Foley Hoag LLP
Contact

[authors: Dean F. Hanley and Paul Bork]

On April 5, 2012, President Obama signed the JOBS Act (Jumpstart Our Business Startups), the culmination of a bipartisan effort by Congress to ease restrictions on capital raising that have affected and guided companies and investors for decades. The bipartisan nature of the process may have resulted in less scrutiny than major securities law revisions often receive; in any case, the SEC is not entirely happy with the results. The law creates a new class of issuer, the “emerging growth company,” and treats this class favorably compared to other pre-Act companies that are essentially similar. The Act also changes the ways that new companies will “go public,” both in terms of their ability to test the waters and in terms of the ability of research analysts to interact with underwriters and investment bankers. Finally, the Act will permit general solicitation and general advertising in private offerings where such activities were formerly prohibited, and creates new exemptions known as the “crowdfunding” exemption and “Regulation A+”.

This alert is a summary of the major features of the JOBS Act. More detailed alerts on parts of the law will be forthcoming in the near future.

What is an Emerging Growth Company?

The Act establishes a new type of issuer, the “Emerging Growth Company” or EGC, which receives new and favorable treatment under the federal securities laws. An EGC is a company (including a foreign company) that meets the following two tests: 

  • Its initial public offering (IPO) is after December 8, 2011; and 
  • It has “total annual gross revenues” of less than $1 billion in its most recently completed fiscal year.

An EGC will continue to have that status until: 

  • The last day of the first fiscal year in which its total annual gross revenues are $1 billion or more; 
  • The date on which the EGC meets the test for “large accelerated filer” (meaning, a company with an unaffiliated public float in excess of $700 million as of the end of its most recent second fiscal quarter, that has been public for a year and has filed at least one annual report with the SEC); 
  • The date on which the EGC has “issued” $1 billion or more of non-convertible debt over the three previous years; or 
  • The last day of the fiscal year following the fifth anniversary of its IPO.

Some Advantages of Going Public as an EGC

There are significant new advantages in the IPO process for EGCs.

Confidential IPO Submissions to the SEC

Prior to the JOBS Act, domestic issuers (and most foreign issuers) wishing to go public had to file their registration statement and preliminary prospectus publicly with the SEC. After the JOBS Act, both domestic and foreign companies may furnish these documents to the SEC in confidential submissions, meaning that the investment community will not know the contents of these submissions (or even that they exist) while they are under review. However, the registration statement and prospectus must be publicly filed at least 21 days before commencing an IPO “roadshow.”

Testing the Waters

Equally significantly, EGCs and “persons authorized to act on their behalf” may test the waters both before and after the filing of the registration statement. That is, they may engage in oral and written communications with “qualified institutional buyers” (QIBs) or “accredited investors” (AIs) to determine their “interest in a contemplated securities offering.” Significantly, these communications will not have to be filed with the SEC as free writing prospectuses, as previously.

Ending Some Restrictions on Analysts

Eliminating protections that have been in place for some time, research analysts, including those working for the underwriters on an EGC’s IPO, may publish research on the IPO both before and after the filing of the registration statement, and after the IPO itself. Research analysts will also be able to participate in meetings with management of an EGC at which investment bankers are present. These changes have raised concerns that analysts may be influenced by their investment banking colleagues seeking to win lucrative business from potentially high flying companies. Another potential conflict of interest is that bankers may use such research to drum up interest in the stock of an EGC, which is often resold to retail investors following an IPO.

Reduced Disclosures for EGCs − The “IPO On-Ramp”

EGCs will be able to use significantly reduced disclosure in the IPO process, including: 

  • Providing only two (instead of three) years of audited financials and Management’s Discussion & Analysis in the IPO registration statement;
  • Omitting “Selected Financial Data” for any period prior to the earliest audited period presented in the IPO registration statement (instead of five years).

Once an EGC has gone public, it will be subject to significantly reduced “scaled disclosure” that is now available only to so-called “smaller reporting companies.” These include: 

  • No requirement for Compensation Discussion & Analysis, and the compensation tables will be limited to three (not five) executives and show only two (not three) years of compensation; 
  • No auditor attestation of internal controls, as required by Sarbanes-Oxley; 
  • No requirement for “say-on-pay” or “say-on-golden-parachute” shareholder advisory votes (these requirements actually will begin to apply to smaller reporting companies starting in 2013); 
  • No requirement to disclose the relationship between executive compensation and company performance, or the ratio of CEO pay to median company pay, as required by Dodd-Frank; 
  • New accounting principles will not apply to EGCs until they apply to all private companies; 
  • No requirement to comply with any future rules that may call for mandatory audit firm rotation or “auditor discussion & analysis,” as proposed in a concept release by the Public Company Accounting Oversight Board.

The JOBS Act effectively creates a new class of public company issuer that will be treated more favorably by regulators than older, smaller companies (“smaller” being a relative term when the ceiling is $1 billion) that are nevertheless good corporate citizens. This disparity is likely to result in a clamor by the non-EGCs for similarly weaker regulation affecting them as well.

Significant Changes to Capital Raising

General Solicitation under Regulation D and Rule 144A

One of the most common methods for raising capital privately utilizes Rule 506 of Regulation D, which is unavailable if there is “general solicitation.” The Act gives the SEC 90 days to revise the rules to end the prohibition on general solicitation or general advertising, so long as the actual purchasers are AIs and the issuer takes reasonable steps to verify AI status. There is a similar provision in the Act affecting Rule 144A, which is commonly used in high-yield debt offerings, so long as the actual purchasers are QIBs. Given the “testing the waters” provisions for EGCs, and the ability to engage in general solicitation in Rule 506 private placements, there may be a good deal of confusion about the SEC doctrine known as integration of offerings: when does one offering end, and another commence? This is an issue that has keenly interested the SEC in the past, but it may be very difficult to make that determination now.

New Exemption for “Crowdfunding” Transactions

The Act also gives the SEC 270 days to create a new exemption for issuers that are not public companies, investment companies, or foreign private issuers. Called “crowdfunding,” the process would involve the offer and sale of a relatively low dollar amount of securities to a large number of investors. This exemption is evidently intended to reflect social networking phenomena such as Kickstarter. These are the conditions for the exemption: 

  • The total amount of securities sold in any 12-month period cannot exceed $1 million; 
  • The amount sold to any investor by an issuer in that 12-month period cannot exceed:    
  •     for investors with annual income or net worth less than $100,000, the greater of $2,000 or 5% of annual income or net worth; or 
  •     for wealthier investors, 10% of the investor’s annual income or net worth but not more than $100,000;
  • The transaction must be conducted through a registered broker or a registered “funding portal” (a compliant funding portal would not have to register as broker or dealer); and
  • The issuer must provide various disclosures and about itself and about risk mitigation.

While it is up to the SEC to provide final rules, the statutory requirements set out in the JOBS Act are not simple and may not be as easy to comply with as the popular press on this subject has suggested.

Regulation A+

For many years, the rules under Regulation A of the Securities Act have authorized an exemption for up to $5 million of securities sold under that Regulation. However, Regulation A is perceived as cumbersome, and Regulation D has been the dominant exemption for private companies raising capital. The JOBS Act directs the SEC to add a new exemption, colloquially referred to in the press as “Regulation A+,” but does not specify a time limit for the SEC to do this. Regulation A+ would cover up to $50 million in equity, debt or convertible securities, and issuers would be able to sell unrestricted securities to any potential purchaser by means of a general solicitation. However, there would be an offering document (subject to “prospectus-like” liability), and the issuer may become subject to periodic reporting requirements. Private companies able to raise capital in traditional private placements may be deterred by the reporting requirements. But smaller public companies may wish to utilize Regulation A+ to raise significant debt or equity without going through the full public registration process with the SEC.

Registering and Deregistering as a Public Company

Under a provision of the Securities Exchange Act, it is possible for a company to become “public” (and subject to the SEC’s extensive reporting rules) as to a class of its equity securities even if it has never sold securities to the public.

A private company had been required to register under the Exchange Act a class of securities held of record by 500 or more persons once the company also had $10 million of assets. The JOBS Act changes this for companies other than banks and bank holding companies to 2,000 or more record holders OR 500 record holders that are not AIs, retaining the asset test in either case. The Act requires the SEC within 270 days to adopt regulations that exclude from these totals any securities sold under the crowdfunding exemption. Moreover, the Act excludes from the term “held of record” any securities received under an employee compensation plan in exempt transactions, but only while the securities are held by the person who received them under the plan. For banks and bank holding companies, the threshold is 2,000 holders with no limit on the number of investors who are not AIs.

The tracking issues implied by these changes are difficult. Issuers will have to find a way to determine whether their securities are owned by AIs or not. Crowdfunding securities may require a separate CUSIP number. And clearly many employees who receive securities under compensation plans will want to dispose of them to realize their value.

Previously, companies with a class of securities registered under the Exchange Act could deregister when there were fewer than 300 holders of record. For companies other than banks and bank holding companies, the limit is still 300 holders to exit the system, but banks and bank holding companies may deregister when the number of holders of record drops below 1,200.

If you have any questions, please contact Dean Hanley or Paul Bork of Foley Hoag’s Corporate Finance and Securities Practice Group or (617) 832-1000 or contact your lawyer at Foley Hoag.

Tags: Venture Capital & Emerging Companies, Corporate Finance and Securities, Securities Litigation, Busines

 

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.

© Foley Hoag LLP | Attorney Advertising

Written by:

Foley Hoag LLP
Contact
more
less

Foley Hoag LLP 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:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. 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. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our 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 are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy 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 our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

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

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.