The JOBS Act
The Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law on April 5, 2012. The 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 (“EGCs”) to make it easier for small businesses and entrepreneurs to raise capital.
The law includes Accounting and Disclosure Changes, Reduced Regulatory Requirements and Other Capital Access Reforms to make it easier for small businesses and entrepreneurs to raise capital.
EGCs are defined by the JOBS Act as having total annual gross revenue of less than $1 billion with a first sale of common equity securities after December 8, 2011.
Companies may maintain their status as EGCs until the earliest of four dates:
- Five years from the EGC’s initial public offering
- The date its annual gross revenue exceeds $1 billion
- The date the Company has issued more than $1 billion in nonconvertible debt
- The date the Company becomes a “large accelerated filer” under SEC rules (worldwide public float over $700 million)
Accounting and Disclosure Changes
EGCs are exempt from some of the more involved accounting and disclosure requirements previously applicable to public companies. EGCs are granted exemptions from: (1) the Sarbanes-Oxley Section 404b requirement to obtain an attestation from an independent auditor regarding the effectiveness of management’s internal controls; (2) mandatory audit firm rotation and auditor discussion and analysis rules, if adopted by the PCAOB; and (3) future PCAOB rules unless specifically required by the SEC for EGCs after the SEC considers certain factors. The exemptions apply for the period in which the company remains an EGC.
Following passage of the JOBS Act, new public issuers now have up to five years to comply with Section 404b, versus the postponement to the second annual report that previously applied.
Note that EGCs still remain subject to Sarbanes-Oxley 404a requirements that require management to evaluate and test the effectiveness of the design and operation of its system of internal controls over financial reporting. The 404b exemption for public companies with float of less than $75 million remains in place for those small public companies not qualifying as EGCs.
Reduced Regulatory Requirements
The JOBS Act includes relaxed public offering rules and SEC compensation disclosure requirements. For example, an EGC is now permitted to:
- Include two years of audited financial statements (instead of three) in its equity initial public offering (“IPO”) registration statement.
- Submit a draft equity IPO registration statement to the SEC for confidential review prior to a public filing (provided that the full IPO submission and applicable amendments are publicly filed with the SEC no later than 21 days before the issuer conducts a roadshow for the applicable IPO).
- Comply with executive compensation disclosure requirements available to smaller reporting companies (generally an issuer with public float less than $75 million).
Other Capital Market Access Reforms
The JOBS Act contains additional significant provisions that will benefit a broad range of private companies seeking to access capital in the private U.S. markets, including:
- Requirement for the SEC to eliminate its ban on general solicitation and general advertising in connection with private offerings to accredited investors under Regulation D (Rule 506) and to qualified institutional buyers under Rule 144A.
- Exemption from Securities Act registration “crowdfunding” transactions (involving access to small amounts of capital through the internet).
- A new exemption similar to Regulation A which would allow issuance of up to $50 million of securities in any 12-month period, up from the current $5 million threshold under Regulation A.
- An increase in the number of shareholders a company may have before being required to register its common stock with the SEC and become a public reporting company from the current threshold of 500 shareholders of record to 2,000 total shareholders (including up to 500 “unaccredited” shareholders).
- A requirement for the SEC to review its Regulation S-K to determine how they may be updated to simplify the registration process and to reduce the costs and other burdens for EGCs.