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JOBS Act: Eases Capital FormationIPO Candidates and Private Companies
10.11.12
Richard LucashMcCarter & English, [email protected]
617.449.6568
Jonathan GuestMcCarter & English, LLP
Securities Laws
♦ Federal Laws impacted by JOBS Act– Securities Act of 1933
“Emerging Growth Company” – new defined term Rule 506/Rule 144A Regulation A
– Securities Exchange Act of 1934
♦ State “Blue Sky” laws – still relevant– “disclosure review” or “merit qualification”– Federal preemption in limited circumstances
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JOBS Act
♦ Jumpstart Our Business Startups Act– Enacted April 5, 2012– Requires SEC rulemaking for full implementation– SEC has issued some FAQs and proposed rules
♦ Bipartisan attempt to stimulate economic growth by lowering barriers to raising capitalI. Reduces requirements for small company IPOsII. Removes restrictions on general solicitation and
advertising in Rule 506/rule 144A offeringsIII. Allows equity crowdfunding for U.S. companies,
subject to limitationsIV. Increases max. size of “mini-IPOs” to $50 MillionV. Eases mandatory SEC reporting triggers
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Crowdfunding
♦ Funding a project or venture by raising small amounts of money from a large number of people
♦ Not possible (for equity) pre-JOBS Act♦ New exemption from registration
– Companies may raise up to $1M in 12 mo.– Federal preemption of state Blue Sky laws– No wealth thresholds for investor participation,
wealth does impact amount that can be invested– Limited disclosure requirements
Partly determined by amount of financing
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Crowdfunding
♦ Companies required to use approved portals– Portals must be registered with SEC and FINRA– Obligations of portals TBD
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Rule 506
Change Under JOBS Act♦ General solicitation/advertising permitted when
SEC adopts new rules ♦ Rule 506 purchasers limited to “accredited”
investors– natural persons; income and net worth tests– Institutional accredited investors
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Rule 506 and Rule 144A
– SEC proposed rules require issuer to “take reasonable steps to verify purchasers are accredited” – avoids rigid tests, verification methods may vary
♦ Unpaid third-party finders permitted for Rule 506 offerings
♦ “Old” rules for 506 offerings without general advertising/solicitation remain
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Mini-IPOs Under Regulation A
Currently (rarely used)♦ Permits sales of securities to the public
– No investor qualification requirements– May “test the waters” before filing offering
documents– Shares freely tradable
♦ Offering statement reviewed by SEC– Streamlined disclosure requirements (vis-a-vis
IPO)♦ Limited to $5 million in 12 month period
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Mini-IPOs Under Regulation A +
JOBS Act♦ Increases $$ threshold to $50 million in 12 mo.♦ Blue Sky laws pre-empted if sales only to
“qualified purchasers” (to be defined by SEC) or shares are listed
♦ Must file disclosure information with SEC and make periodic reports, incl. audited financials
♦ Imposes prospectus liability under Section 12(a)(2)
♦ No specific deadline for new rules9
Emerging Growth Company
♦ “Emerging Growth Company” – a new category of issuer
♦ Qualify as EGC if – total gross revenues in most recent fiscal year < $1B
and– no registered public offering before 12/8/12
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Emerging Growth Company
♦ Remain EGC until earliest of:– Annual gross revenues exceed $1B– Last day of fiscal year that is 5th anniversary of
common equity IPO– Issued more than $1B non-convertible debt during
previous 3 year period– Becomes “large accelerated filer” - public float above
$700M
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Emerging Growth Company – IPO process
♦ IPO “process” benefits for ECGs:– Confidential submission of registration
statements – Pre-IPO research reports by broker/dealer not
deemed an “offer” or “sale” – Can communicate with QIBs and accredited
institutional investors to “test the waters”– Only 2 years of audited financial statements
(and related MD&A); can omit certain “selected financial data”
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Emerging Growth Company
– May elect reduced executive compensation disclosure available to “smaller reporting companies” (no CD&A, 3 rather than 5 NEOs, 2 years’ summary compensation)
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Emerging Growth Company – post-IPO
Reduced SEC reporting post-IPO – exempt from:– Auditor attestation report (SOX 404)– Shareholder advisory votes on executive comp
(“say-on-pay”)– Executive compensation comparisons– Mandatory audit firm rotation– “Pay v. performance” information and CEO v.
median employee compensation comparison
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’34 Act reporting threshold increase
♦ Current law: 500 shareholders of record (and more than 300 U.S. residents) plus $10 million total assets triggers obligation of foreign company to file reports with the SEC
♦ JOBS Act: holders of record increased to 2,000 and fewer than 500 not “accredited” (compensation plan awardees exempt)
♦ Listed “foreign private issuers” can still elect Rule 12g3-2(b) exemption
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Takeaways
1. JOBS Act should make capital formation easier2. But a lot depends on SEC rules3. Crowdfunding by small investors not yet permitted
– SEC rules are coming4. Rule 506 with general solicitation will require
special attention to accredited investor verification techniques
5. Emerging growth company attractive for issuers: easier IPO and “slower route” to full SEC compliance
6. Reg A+ could be attractive “middle route” for raising capital and creating liquidity
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Panelists
Richard LucashMcCarter & English, [email protected]
617.449.6568
Questions?
Jonathan GuestMcCarter & English, LLP
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