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Capital Markets Alert: JOBS Act Will Help “Jump-Start” Corporate Engines by Restoring Access to Public Capital

The Jumpstart Our Business Startups Act ("JOBS Act" or the "Act"), which is pending President Obama's signature, may ultimately improve the ability of small and medium-sized enterprises ("SMEs") to launch initial public offerings ("IPOs"), raise additional capital through private as well as public offerings, and create jobs without, in the opinion of its supporters, compromising investor protection. It will also raise the threshold for the point at which privately held companies are required to register with the Securities and Exchange Commission ("SEC") and incur the costs of periodic filings, and make it easier for smaller, non-public companies to raise capital through offerings exempt from SEC registration.

Details With the U.S. Senate and House of Representatives providing final approval to the JOBS Act (H.R. 3606) on March 22nd and March 27th, respectively, it is now awaiting President Obama's signature, which he has indicated he will provide.

As discussed in our previous alert in February 2012, the bill would create a new category for issuers called "emerging growth companies" that have annual revenues of less than $1 billion at the time of an IPO and a public float of less than $700 million. Emerging growth companies would enter a regulatory "on-ramp" period of up to five years during which they would be temporarily exempt from many of the financial control and reporting requirements of the Sarbanes-Oxley Act and various SEC regulations. The regulatory on-ramp with the exemptions for emerging growth companies would expire after five years, or earlier if the company reaches $1 billion in annual revenue or $700 million in public float.

As we previously reported, during the on-ramp period:

  • Requirements to audit internal control over financial reporting, to conduct certain shareholder votes, and to provide certain disclosures related to executive compensation would be suspended;
  • Restrictions on the provision of analyst research and company information to investors prior to the IPO would be eliminated; and
  • The registration statement for the IPO would only be required to include audited financial statements for two, rather than three, years. (This would not apply to post-IPO registration statements or 10-Ks.)

In addition, during the on-ramp period, the emerging growth companies would be exempt from:

  • Adopting new or revised accounting standards effective for public companies (effective dates for private companies would apply); and
  • Many current and future executive compensation disclosures.

Under the Act, emerging growth companies would be able to:

  • Publicly advertise and promote private securities offerings;
  • Confidentially submit an equity IPO registration statement for SEC staff review (the initial submission would need to be filed three weeks before the IPO road show); and
  • Comply with the SEC's executive compensation disclosure requirements on the same basis as smaller reporting companies.

By amending Section 12 (g) of The Securities Exchange Act of 1934 to increase the number of record holders that are needed to trigger required registration as a public company from 500 to 2,000 persons of which no more than 500 are "non-accredited" investors, the JOBS Act would enable more companies to preserve capital by avoiding the costly process of filing annual and other periodic reports with the SEC. The trigger would be further relaxed by not including in the overall count those persons who received their securities through employee stock option plans or through "crowdfunding," as described below.

The ability of companies to raise capital through private offerings that are exempt from SEC registration would also be enhanced under the JOBS Act. The SEC would be required to lift its prohibition against solicitation of investors and advertising in a private offering under Rule 506 of Regulation D if all of the participants in the offering are "accredited investors." The maximum amount that could be raised through offerings exempt under Regulation A (which previously has been rarely used) to "qualified institutional buyers" would increase from $5 million to $50 million with solicitation and advertising also permitted in such offerings. However, companies that complete Regulation A offerings will be subject to specified annual reporting requirements.

In addition to enhancing the existing exemptions for raising capital under Regulation A and Regulation D, the JOBS Act would establish a new form of exemption from registration under the Securities Exchange Act for offerings by U.S. companies that are not subject to periodic Exchange Act requirements through "crowdfunding" transactions that meet certain specified criteria.

Crowdfunding refers to the use of the internet, social media, and other similar means to access a large group of investors, each of whom would invest small amounts in the issuing company with specified annual limits based on annual income or net worth (the maximum amount for an individual investor would be $10,000). Among other things, a company could not raise more than $1 million from all investors through crowdfunding during any 12-month period. The company would have to file a report with the SEC and provide prospective investors with financial and other information about the business and the offering. Audited financial statements would be required for offerings of more than $500,000. The offering would have to be made using a qualified "crowdfunding portal" or a registered broker/dealer that complies with certain requirements. Subsequent to the consummation of the offering, the company would have to file annual financial reports with the SEC.

Crowdfunding portals are expected to be used as the primary mechanism by which securities are offered to the public. Crowdfunding portals would not need to register as broker/dealers as long as they comply with certain requirements, including, but not limited to, registering with an applicable self-regulatory organization, providing investors with disclosures and education materials related to investment risks, and taking measures to reduce fraud.

Our View of the News We believe that the passage of this bill signifies that Congress recognizes that small companies need capital in order to innovate and create jobs that will bolster the economy. For some time, J.H. Cohn has believed that the U.S. needs to "jump-start" corporate engines by restoring access to public capital. Capital, in all its forms, is the underpinning of job creation. Further, we need to create a more efficient delivery system for SMEs to access the capital markets. This includes removing the friction that small companies experience when raising capital. The passage of this bill is a sign toward that very direction.

What's Next?

After the president signs the JOBS Act into law, the SEC will need to release enabling rules regarding certain aspects of the legislation, such as general solicitation rules for private offerings under Regulation D, within 90 days of enactment. Thereafter, the SEC has up to 270 days to release rules for other portions of the Act, including crowdfunding.

With that being the case, the Act will likely take effect for issuers in early 2013.

For more information on this issue or to discuss going public, please contact Richard Salute, CPA, J.H. Cohn partner and Capital Markets and SEC Practice director, at or 516-336-5501, or your J.H. Cohn engagement partner at 877-704-3500.

Download the full PDF.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Published date: 4/4/2012

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