Tuesday, March 27, 2012

House Agrees to Senate Amendment to the JOBS Act, Thereby Clearing the Jumpstart Our Business Startups Act for the President

The House has agreed to the Senate Amendment to HR 3606, the Jumpstart Our Business Startups (JOBS) Act and sent the bill to the President for his signature. Financial Services Chair Spencer Bachus (R-AL) requested a recorded vote to be taken later today. The Act is designed to get small businesses and entrepreneurs back into the game by removing costly regulations and making it easier for them to access capital. This legislation also paves the way for more start-ups and small businesses to go public, which will attract new investors and will allow small businesses to grow and create jobs.

The legislation creates a new category of what is called emerging growth companies that will reduce costs for small companies to go public. Emerging growth companies are exempted from certain regulatory requirements until the earliest of three dates: (1) five years from the date of the emerging growth company’s initial public offering; (2) the date an emerging growth company has $1 billion in annual gross revenue; or (3) the date an emerging growth company becomes a large accelerated filer, which is defined by the SEC as a company that has a worldwide public float of $700 million or more. The legislation thus provides temporary regulatory relief to small companies, which encourages them to go public, yet ensures their eventual compliance with regulatory requirements as they grow larger.

Title I is the Reopening American Capital Markets to Emerging Growth Companies Act, which would help more small and mid-size companies go public. During the last 15 years, fewer and fewer start-up companies have pursued initial public offerings because of burdensome costs created by a series of one size-fits-all laws and regulations. These changes have driven up costs and uncertainty for young companies looking to go public. Not going public deprives companies of the needed capital to expand their businesses, develop innovative products, and hire more American workers.

Title I would create a new category of issuers called emerging growth companies companies that have less than $1 billion in annual revenues when they register with the SEC and less than $700 million in public float after the IPO. Emerging growth companies will have as many as 5 years, depending on size, to transition to full compliance with a variety of regulations that are expensive and burdensome. This on ramp status will allow small and midsize companies the opportunity to save on expensive compliance costs and create the cash needed to successfully grow their business and create jobs. It will also make it easier for potential investors to get access to research and company information in advance of an IPO in order to make informed decisions about investing. This is critical for small and medium-sized companies trying to raise capital that have less visibility in the marketplace.

The Act creates an expanded on-ramp for newly public companies by exempting a new
category emerging growth companies with less than $1 billion in revenues or $700 million in public float for up to five years from a variety of securities law requirements, including: say-on-pay votes; certain executive compensation reporting; requirements to provide 3-years of audited financials (companies would only need 2 years worth), Sarbanes-Oxley Act Section 404(b) auditor attestation of management’s report on internal controls over financial reporting; and any future auditor rotation or other auditor requirements. The Act also eases restrictions on communications and research related to an IPO.

Title II is the Access to Capital for Job Creators Act, which amends section 4(2) of the Securities Act to permit the use of public solicitation in connection with private securities offerings, provided that the issuer or underwriter verifies that all purchasers of the securities are accredited investors. In addition, the SEC would have to share offering materials and documentation with the states.

Title III contains the crowdfunding provision designed to enable aspiring entrepreneurs to access investment capital via the Internet from small dollar investors across America. Title III came by way of a Senate Amendment, authored by Senator Jeff Merkley (D-OR), whihc reolaced the original HOuse Title III. Senator Merkley said that the possibility for capital formation through the Internet through crowdfunding is enormous, noting that, in 2011, Americans had invested $17 trillion in retirement funds. Imagine, continued the Senator, if one percent of those investments went into crowdfunding. The result would be $170 billion of investment in startups and small businesses. (Cong. Rec. (Mar 20, 2011) H1828-1829)

Title IV creates a new and larger exemption, effectively raising the limit from $5 million to $50 million for Regulation A security offerings and permitting a more streamlined approach for smaller issuers. The current limit is $5 million, but the mechanism is little used due to the small size of issuances permitted. The legislation would permit the SEC to impose conditions on issuance under the rule, and would require periodic review of the limit.

Title V of the Act is the Private Company Flexibility and Growth Act, authored by Rep. David Schweikert (R-AZ), which increases the number of shareholders that can invest in a private company from 500 to 2,000 without triggering SEC reporting duties, only 500 of which can be non-accredited investors, with 1500 having to be accredited investors as defined by the SEC. Originally, Title V raised the 500-shareholder threshold to 1000. The threshold was raised to 2000 pursuant an amendment offered by Rep. Brad Miller (D-NC). Title VI of the Act raises the number of shareholders permitted to invest in a community bank from 500 to 2,000.

Title VII of the Jumpstart Our Business Startups Act directs the SEC to provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by the Act. This provision came by way of a House-approved a floor amendment offered by Rep. Dave Loebsack (D-Iowa). The amendment is designed to ensure that small businesses that may face unique challenges are fully aware of the benefits of the legislation.