On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), which is intended to help smaller and emerging growth companies raise capital in the U.S. markets.
The JOBS Act amends, and adds new sections to, the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), as well as the Sarbanes-Oxley Act of 2002.
The JOBS Act implements measures relating to initial and direct public offerings and creates a new category of issuer known as the Emerging Growth Company.
The JOBS Act defines an Emerging Growth Company as an issuer with annual gross revenues of less than $1 billion during its most recent fiscal year.
In addition to the creation of the Emerging Growth Company, Section 401 of the JOBS Act permits securities offerings of up to $50 million in any 12-month period under a new exemption to be established by the SEC under Section 3(b) of the Securities Act of 1933 (the “Securities Act”). The JOBS Act did not establish a deadline for the SEC to establish the new 3(b) exemption.
The JOBS Act amendments to Regulation A provide significant benefits for companies who conduct IPOs as well as those who go public direct.
Regulation A is an exemption from registration under Section 3(b) that is available to non-reporting issuers. A security issued in a Regulation A offering is a “covered security” under Section 18 of the Securities Act and, therefore, exempt from state registration, documentation and offering requirements so long as the security is offered or sold on a national securities exchange or offered or sold to a qualified purchaser as defined by SEC rules.
The JOBS Act provides that:
• The issuer may raise up to $50 million without registration under the Securities Act.
• The securities may be offered and sold publicly.
• The securities will not be restricted securities.
• Securities Act Section 12(a)(2) liability will apply to any person offering or selling the securities.
• The issuer may “test the waters” prior to filing any offering statement, subject to terms and conditions specified by the SEC.
• The issuer must file audited financial statements with the SEC annually.
The new exemption requires the SEC to issue implementing rules regarding disclosures required in Regulation A offerings including delivery of the offering statement and other information about the issuer to investors. Additionally, the SEC may impose other terms and conditions that it deems necessary in the public interest for the protection of investors, including a requirement that the issuer prepare and file an offering statement and related documents with the SEC that include audited financial statements, a description of the issuer’s business operations, its financial condition, its corporate governance principles, its use of investor funds and other appropriate matters. Further, the SEC may adopt disqualification provisions for bad actors similar to those in regulations adopted under Section 926 of the Dodd-Frank Act.
Under the JOBS Act, the SEC may also enact rules requiring issuers using Amended Regulation A to provide periodic disclosures regarding the issuer, its business operations, its financial condition, its corporate governance principles, its use of investor funds, and other matters.
The JOBS Act changes to Regulation A offerings are designed to reduce the costs and regulatory burdens for companies seeking to raise capital and obtain public company status. Most companies who elect to go public direct will raise less than the $50 million ceiling for Regulation A offerings under the JOBS Act. As a result, once the SEC completes its rulemaking obligations, direct public offerings by companies conducting Regulation A offerings will likely be appealing cost effective methods for private companies seeking to go public and maintain public company status.