On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The new law is designed to help smaller companies access the capital markets by easing private capital formation and reducing certain regulatory requirements for smaller companies going public. Among other things, the JOBS Act
In this article we provide a summary of the key features of the JOBS Act. The SEC’s Division of Corporation Finance has also published guidance set forth in Frequently Asked Questions (FAQs) on the JOBS Act, which guidance is also reflected in this article.
The JOBS Act eases some of the initial public offering requirements for companies with less than $1 billion in annual revenues and also reduces their reporting and disclosure obligations for up to five years post-IPO.
Definition of emerging growth company.
An emerging growth company is defined as an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year, other than any such issuer whose IPO occurred on or before December 8, 2011. Consequently, companies that went public after December 8, 2011, but before the JOBS Act effective date, may qualify as emerging growth companies and enjoy the benefits of the lighter regulatory burden imposed on such companies.
An emerging growth company will lose its status as such on the earliest of
Reduced Registration And Disclosure Requirements.
Emerging growth companies will be subject to less stringent registration requirements under the Securities Act of 1933 (the “Securities Act”) and reduced disclosure requirements under the Securities Exchange Act of 1934 (the “Exchange Act”) as follows:
The JOBS Act requires the SEC, within 90 days after the enactment date of the Act, to revise Regulation D to provide that the current prohibitions against general solicitation or general advertising contained in Rule 502(c) do not apply to offers and sales of securities made pursuant to Rule 506 (which applies to offerings without regard to dollar amount) provided that all purchasers of the securities are accredited investors. The revised rules must require the issuer to take reasonable steps to verify that the purchasers are accredited investors according to such methods as determined by the SEC. Within the same 90 days, the SEC must make similar changes to Rule 144A to provide that securities sold under the rule may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising, provided the securities are ultimately sold to only persons the seller and any person acting on its behalf reasonably believe are qualified institutional buyers.
The JOBS Act also amends Section 4 of the Securities Act to expressly provide that offers and sales made pursuant to revised Rule 506 will not be deemed public offerings under the federal securities laws as a result of general advertising or general solicitation. Consequently, Rule 506 offerings by funds relying on the exclusions from being considered an “investment company” set forth in Sections 3(c)(1) and 3(c)(7) under the Investment Company Act should enjoy the benefits of the new general solicitation provisions.
The JOBS Act also provides that a person is not required to register as a broker or dealer with respect to a Rule 506 offering solely because the person maintains a trading platform with respect to securities, permits general solicitations or advertisements or engages in certain ancillary services so long as, among other things, neither such person nor any associated person (i) receives any compensation in connection with the purchase or sale of such securities or (ii) possesses customer funds or securities in connection with the transaction. This provision helps clarify the requirements that must be satisfied by online platforms and other matching services to avoid broker-dealer registration.
Section 3(b) of the Securities Act allows the SEC to exempt from the Securities Act’s registration requirements offerings of up to $5 million. Pursuant to this provision, the SEC has promulgated Regulation A, which allows a non-reporting issuer relying on the exemption to raise up to $5 million during any 12-month period. Securities issued in a Regulation A offering are not restricted securities. The JOBS Act adds an additional exemption to Section 3(b) for offerings of up to $50 million, subject to certain conditions. The JOBS Act also exempts offerings made in reliance on the new exemption from state securities laws relating to registration, documentation and offering requirements if the securities are offered and sold on a national securities exchange or sold to “qualified purchasers,” as defined by the SEC. The higher offering cap and the exemption from state blue sky laws should increase the appeal of the Section 3(b) offering exemption for smaller companies, particularly for smaller companies that want to avoid the costs of a registered offering but not be constrained by the purchaser limitations of Regulation D.
Under amended Section 3(b) of the Securities Act, the SEC is required to adopt rules or regulations exempting securities from the registration requirements of the Securities Act in accordance with the following:
The JOBS Act raises the number of shareholders a company can have before it is required to register a class of equity securities with the SEC under Section 12(g) of the Exchange Act. Under the new threshold, a company must register a class of equity securities within 120 days after the last day of its first fiscal year on which the company has more than $10 million in total assets and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited investors. Previously, the number of record holders that would trigger the registration requirement was 500. In determining the number of record holders, securities held by persons who received the securities under an equity compensation plan in a transaction exempt from the registration requirements of the Securities Act are not counted. In addition, the SEC is required to adopt rules conditionally or unconditionally excluding securities acquired in an exempt crowdfunding transaction, as discussed below, from the determination of the number of record holders.
The JOBS Act amends the Securities Act by adding a new Section 4(6) that exempts certain crowdfunding offerings from the registration requirements of the Securities Act. Crowdfunding, which has become popular in recent years with the growth in social media, typically involves raising funds for a common cause or venture through small contributions from many individuals. The new exemption would allow a non-reporting issuer to raise up to $1 million in any 12-month period in reliance on the exemption. To qualify for the exemption, several conditions must be satisfied:
Cap on amount raised.
The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, cannot exceed $1 million.
Cap on individual investments.
The aggregate amount that can be sold to any investor during the 12-month period cannot exceed
Required use of broker or funding portal.
The transaction must be conducted through a broker or funding portal that complies with the exemption’s requirements. A funding portal is defined as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others solely pursuant to Section 4(6) that does not offer investment advice or recommendations; solicit purchases or sales of securities offered or displayed on its website or portal; compensate employees, agents or others for such solicitation; or possess or otherwise handle investor funds or securities.
A broker or funding portal acting as an intermediary in a Section 4(6) transaction must, among other things
No issuer advertising.
The issuer cannot advertise the terms of the offering, except for notices directing investors to the funding portal or broker.
The issuer must file with the SEC and provide to investors and the broker or funding portal certain information, including information about
No undisclosed offering compensation.
The issuer cannot compensate any person to promote its offerings through communication channels provided by a broker or funding portal, unless such compensation is clearly disclosed in accordance with such rules that the SEC may require.
The issuer must file with the SEC and provide to investors annual reports of its results of operations and financial statements.
Crowdfunding offerings meeting the requirements of the exemption will be exempt from state blue sky regulation relating to registration, documentation and offering requirements. Securities issued in a Section 4(6) transaction may not be transferred for one year after purchase, unless they are registered or are transferred to the issuer, an accredited investor, or a family member, or in connection with the purchaser’s death or divorce, and subject to such other restrictions as the SEC may impose.
The Section 4(6) exemption is available for only domestic companies that are neither reporting companies under the Exchange Act nor investment companies. In addition, certain “bad actors” (who will be substantially similar to those disqualified under Regulation A) will not be eligible for the exemption.
A company issuing securities in reliance on the crowdfunding exemption will have the same liability as if Section 12(a)(2) of the Securities Act applied. For purposes of the liability provision, an "issuer" is broadly defined to include directors, partners and officers of an issuer and any person who offers or sells the securities in the offering.
The SEC is required to issue rules implementing Section 4(6) within 270 days after the enactment date of the JOBS Act.
The stated purpose of the JOBS Act is to “increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.” By raising the cap on Section 3(b) exempt offerings, easing the IPO process and increasing the threshold for Exchange Act registration, the new law should facilitate capital raising by smaller companies. In addition, all companies should benefit from the lifting of the ban on advertising in Regulation D and Rule 144A offerings.
 As of the date of this publication, the SEC’s Division of Corporation Finance had published three sets of FAQs, which are located at http://www.sec.gov/divisions/corpfin/cfjobsact.shtml.
 For purposes of the JOBS Act, the date of a company's initial public offering is defined as the date of the first sale of its common equity securities pursuant to an effective registration statement under the Securities Act. While in most instances, this would be the date of a company’s initial primary offering of common stock, an initial public offering for purposes of the JOBS Act could occur through the sale of securities registered for resale by selling security holders or through a sale of securities pursuant to an employee benefit plan registered on Form S-8. See Question 1 of the SEC’s Division of Corporation Finance FAQs dated April 10, 2012.
 “Non-convertible debt” means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not. See Question 17 of the SEC’s Division of Corporation Finance FAQs dated April 16, 2012.
 A large accelerated filer is an issuer that meets the following conditions as of the end of a fiscal year: (1) the issuer had an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates of $700 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter, (2) the issuer has been subject to the Exchange Act’s reporting requirements for a period of at least 12 calendar months, (3) the issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act, and (4) the issuer is not eligible to use the disclosure requirements for smaller reporting companies in its annual and quarterly reports.
 Although the language in the JOBS Act was not clear on whether an emerging growth company was entitled to the reduced selected financial data disclosure in its IPO registration statement, the SEC clarified that it would not object if an emerging growth company so limited its selected financial data disclosure in its IPO registration statement. See Question 11 of the SEC’s Division of Corporation Finance FAQs dated April 16, 2012.
 On April 10, 2012, the SEC’s Division of Corporation Finance published FAQs relating to the confidential submission process.
 See Question 8 of the SEC’s Division of Corporation Finance FAQs dated April 10, 2012.
 The PCAOB has issued concept releases on these items, but has not yet adopted rules implementing these requirements.
 A smaller reporting company, in general, is an issuer with a public float of less than $75 million, or if the issuer has no public float, with annual revenues of less than $50 million. Smaller reporting companies (1) are not required to include a Compensation Discussion and Analysis, (2) must provide information on only three (rather than five) named executive officers, (3) must include only three (rather than seven) compensation tables, and (4) must provide only two (rather than three) years of compensation in the Summary Compensation Table.
 Disclosure of these comparisons by public companies is mandated under the Dodd-Frank Act, but the SEC has not yet adopted rules implementing these requirements.
Questions 13 and 14 of the SEC’s Division of Corporation Finance FAQs dated April 16, 2012 discuss the notification process for opting-in.
 Felons and other categories of “bad actors” will be disqualified in accordance with rules to be adopted by the SEC. The disqualification provisions must be similar to those that the SEC is required to adopt for Regulation D offerings pursuant to Section 926 of the Dodd-Frank Act. The SEC has proposed, but not yet adopted, the disqualification provisions for Regulation D.
 The JOBS Act also raises the threshold for registration under Section 12(g) by banks and bank holding companies to 2,000 holders of record. Also, a bank or bank holding company will cease to be subject to Exchange Act reporting if its shareholder base falls below 1,200 record holders.
N. Kathleen Friday, P.C., Partner in the Dallas office of Akin Gump, has extensive experience in a wide range of corporate and securities matters, with particular emphasis in the areas of public company mergers and acquisitions, corporate governance and securities law compliance. Tracy Crum, Senior Counsel in the Dallas office, encompasses in her practice all aspects of corporate and securities law, with particular emphasis in the areas of corporate governance and securities law practice.