The U.S. House of Representatives voted earlier today (March 8, 2012) to pass the Jumpstart Our Business Startups (JOBS) Act. The bill is actually a compilation of six separate measures that have been proposed in Congress (and in some instances already passed in the House) which loosen securities restrictions on smaller companies. Here are brief summaries of each measure:
The Reopening American Capital Markets to Emerging Growth Companies Act (H.R. 3606; the rest of the bills were added to this one). This bill is also known as the “IPO On Ramp” and it creates a new category of company called an “emerging growth company,” which is defined roughly as a public company with less than $1 Billion in revenue. An issuer that is an emerging growth company as of the first day of a fiscal year will continue to be one until the earliest of (i) the last day of the fiscal year during which the issuer had $1 billion in annual gross revenues or more; (ii) the last day of the fiscal year following the fifth anniversary of the issuer’s IPO date; or (iii) the date in which the issuer is deemed to be a large accelerated filer, defined by the SEC as an issuer with more than $700 million in public float. In addition, a company would not be considered an emerging growth company if it has issued more than $1 billion in non-convertible debt over the prior three years. An emerging growth company would enjoy more lax regulation by the SEC. For instance, the bill would allow emerging growth companies to defer compliance with Section 404(b) of the Sarbanes-Oxley Act until the company is no longer considered an emerging growth company. Section 404(b) requires the company’s auditor to report on and attest to management’s assessment of the company’s internal controls, a requirement that carries high compliance costs. In addition, the bill would only require emerging growth companies to provide audited financial statements for the two years prior to their IPO rather than three years. The bill also exempts emerging growth companies from new corporate governance requirements within the Dodd-Frank Act, namely the so-called “say on pay” requirement and the requirement that public companies calculate and disclose the median compensation of all employees compared to the CEO. The bill would remove restrictions prohibiting investment banks that underwrite a company’s IPO from publishing research on emerging growth companies and would expand the range of permissible pre-filing communications to “qualified institutional buyers” or “accredited investors.”
The Access to Capital for Job Creators Act (formerly H.R. 2940). As discussed in a previous post, this bill essentially removes the general solicitation prohibition on offerings made under Rule 506 of Regulation D.
The Entrepreneur Access to Capital Act (formerly H. R. 2930). This is the “crowdfunding” bill, which I’ve discussed at length in the following posts: Is action forthcoming on a crowdfunding exemption to Federal securities laws?; Bill Creating Crowdfunding Exemption from Securities Registration Passes U.S. House of Representatives; What does the future hold for crowdfunding legislation?; Implications of the Pending Startup Crowdfunding Bill.
The Small Company Formation Act (formerly H. R. 1070). This bill would increase the offering threshold for companies exempted from SEC registration under Regulation A from $5 million to $50 million. It would also preempt state blue sky laws with regards to such offerings if they are traded on a national exchange. Regulation A is a little used exemption from registration that permits an exempt public offering using a type of “short form” registration. It is rarely used for two reasons: (i) it has a limit of $5 million and (ii) there is no preemption and so the offerings are subject to blue sky laws. This bill would eliminate both of these obstacles.
The Private Company Flexibility and Growth Act (formerly H.R. 2167). This bill raises the number of shareholders a company can have before it is forced to go public from 500 to 1,000. In addition, it also excludes employees from counting against this limit. More details can be found on a previous post on this topic: Bill Introduced in Congress to Permit Private Companies to Stay Private for Longer.
The Capital Expansion Act (formerly H.R. 4088). This bill raises the number of shareholders permitted to invest in a community bank from 500 to 2,000. The issue here is that community banks are often forced to engage in expensive Exchange Act reporting because they have over 499 shareholders. This bill would remove this expense for many of them.
The vote was lopsided and the White House has indicated that it is supportive, so the bill has a decent chance of become law. That said, don’t let the lopsidedness of the vote fool you. There is genuine opposition to these bills in the Senate that has been building for some time. There are some significant concern that the legislation will increase the incidence of securities fraud, particularly for senior citizens. Therefore, stay tuned.
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© 2012 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
