Public Companies News
On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”), which was previously passed by the Senate and House of Representatives in late March. The JOBS Act represents the most significant legislative relaxation of restrictions relating to the IPO process and public company reporting requirements in recent history.
The JOBS Act contains two categories of reform: changes to the IPO process and modifications designed to facilitate access by private companies to capital in the U.S. The changes to the IPO process and certain other provisions of the JOBS Act became effective upon enactment. However, as set forth specifically below, in some instances, certain of the provisions designed to facilitate capital access by private companies will become effective upon promulgation of rules by the Securities and Exchange Commission (the “SEC”).
Although the JOBS Act will have the greatest impact on companies with annual gross revenues of less than $1 billion (indexed for inflation), additional provisions will benefit a broader range of private companies.
Changes to the IPO Process
Title I of the JOBS Act amends the Securities Act and the Exchange Act to create a new category of issuer, an emerging growth company (or “EGC”). An EGC is defined as any issuer that had total annual gross revenues of less than $1 billion (indexed for inflation) during its most recently completed fiscal year, other than issuers that completed an initial public offering on or prior to December 8, 2011. All EGCs have the option to pursue a streamlined IPO process and, following completion of the IPO, will have up to five years to achieve full compliance with certain disclosure regulations and accounting and auditing standards that are currently applicable to all U.S. public companies. It is estimated that over 90% of companies that filed for IPOs in 2011 would qualify as EGCs.
During this “IPO on-ramp” period, an EGC is permitted the following exemptions from, or modifications of, otherwise-required disclosures and accounting and auditing standards.
- Audited Financial Statements and MD&A – An EGC is required to provide only two years of audited financial statements in its IPO registration statement rather than the three years required for other issuers (and the management’s discussion and analysis of financial condition and results of operations need only cover two years). Additionally, an EGC does not need to present selected financial data for any period prior to the earliest audited period presented in its IPO registration statement.
- Application of New Accounting Standards – EGCs will not be subject to any newly adopted or revised accounting standards until such standards are deemed to apply to companies that are not “issuers” within the meaning of the Sarbanes-Oxley Act of 2002.
- Internal Controls Audit Attestation – EGCs are exempt from the requirement that an independent registered public accounting firm attest to an issuer’s internal control over financial reporting.
- Audit Firm Rotation – EGCs will be exempt from any future mandatory audit firm rotation requirement and any rules requiring that auditors provide additional information about the audit or financial statements of the issuer that the Public Company Accounting Oversight Board may adopt.
- Executive Compensation – EGCs have the option of complying with disclosure requirements applicable to smaller reporting companies with respect to executive compensation.
- Say-on-Pay; Frequency of Say-on-Pay; Golden Parachute Exemption – EGCs are exempt from the requirement that issuers seek shareholder approval of an advisory vote on executive compensation arrangements, including golden parachute compensation.
- Investor and Analyst Communications – EGCs have a greater ability to communicate with certain potential investors (qualified institutional buyers or institutional accredited investors) with respect to offerings of securities. Analysts also have an increased ability to communicate with management, including attending meetings with management in certain instances.
- Confidential Registration Statements – EGCs are permitted to submit IPO registration statements and subsequent registration statements for SEC review on a confidential basis, so long as a public filing is made at least 21 days prior to the roadshow for the public offering.
An EGC will retain its status as such until the earliest of (a) the first fiscal year after its annual revenue exceeds $1 billion, (b) the first fiscal year following the fifth anniversary of its IPO, (c) the date when the company has issued more than $1 billion in non-convertible debt securities (over the previous three-year period), and (d) the first fiscal year in which the company becomes a large accelerated filer.
A company may choose to forgo any of the exemptions provided to EGCs under the JOBS Act and instead comply with the requirements applicable to non-EGCs. However, an EGC must determine whether it will avail itself of the exemption regarding time to comply with new and revised accounting standards at the time the company is first required to file a registration statement or report with the SEC.
Private Capital Reforms
General Solicitation; General Advertising – The JOBS Act directs the SEC to modify Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act to eliminate the prohibition on “general solicitation and general advertising” as it applies to offers and sales of securities made pursuant to those rules. With respect to Rule 506 placements, the prohibition would not apply so long as all purchasers are accredited investors. With respect to Rule 144A offers, the prohibition would not apply if the securities are sold only to persons reasonably believed to be qualified institutional buyers. The SEC must make the changes to Rule 506 within 90 days.
Threshold for Registration – The JOBS Act raises the threshold that triggers registration with the SEC under Section 12(g) of the Exchange Act based on the number of shareholders. Companies are now required to register only when they have (a) more than $10 million in assets and (b) a class of equity securities held of record by (i) 2,000 persons or (ii) 500 persons who are not accredited investors. For banks and bank-holding companies, the threshold is 2,000 persons (whether or not all are accredited investors). Additionally, the definition of “held of record” will be modified to exclude (a) persons who received securities pursuant to an employee compensation plan in transactions exempt from registration and (b) purchasers of securities under the “crowdfunding” provisions (discussed below). Furthermore, the threshold that permits deregistration for bank and bank-holding companies changed from 300 persons to 1,200 persons. The changes to the number of shareholders of record for public reporting obligations became effective upon enactment.
Expansion of Regulation A – The JOBS Act amends the threshold for offerings under Section 3(b) of the Securities Act, thereby modifying Regulation A (conditional small issues exemption) to permit offerings of up to $50 million in aggregate offering amount in any 12-month period (as compared to the current $5 million limitation). Changes to Regulation A will require SEC rulemaking, but no time limit is set by the JOBS Act.
Crowdfunding – Private companies will be permitted to raise limited amounts of capital from small investors without registration under federal or state securities laws by using an SEC-registered broker or a newly created class of SEC-registered funding portals to “crowdfund.” A private company may raise up to $1 million in any 12-month period by issuing restricted securities. The aggregate amount an individual may invest in crowdfunded securities (regardless of issuer) will be capped, depending on each investor’s annual income and net worth, at amounts ranging from $2,000 to $100,000. The issuer and the securities’ intermediary will need to meet a number of one-time and ongoing requirements, such as providing certain information to investors, in order to rely upon this exemption. Additionally, issuers (which includes directors and executive officers) will be liable to the purchasers of these securities, who may sue for damages or a rescission of their investment in the event of any material misstatements or omissions.
Within 270 days of enactment, the SEC must issue rules implementing the new crowdfunding exemption and establishing bad actor disqualification provisions for both issuers and intermediaries,
BABC Attorneys Involved in Legislation
During the drafting of the JOBS Act, members of BABC’s Corporate and Government Affairs practice groups met with staff for the House Financial Services Committee to discuss certain aspects of the Act. BABC attorneys provided their perspective on ways to generate additional capital investment, and we are pleased that some of our suggestions made it into the final legislation. The members of the BABC Government Affairs practice group provide advocacy services at the federal, state and local levels. Our members routinely work on legislation, such as the JOBS Act, and regulations for our clients. If you have questions about our Government Affairs practice group, please contact David Stewart (205-521-8368) or