Wednesday, March 07, 2012

House Approves Amendments to JOBS Act as HR 3606 Moves Toward Passage

The House approved floor amendments to the Jumpstart Our Business Startups (JOBS) Act as it considers HR 3606, whose final passage is almost a certainty. The House is expected to continue consideration of additional amendments tomorrow, with a final vote possible by the end of the day.

HR 3606 reduces the costs of going public by providing companies with a temporary reprieve from SEC regulations by phasing in certain regulations over a five‐year period, thereby allowing smaller companies an on ramp to go public sooner. The measure also removes an SEC regulatory ban preventing small businesses from using advertisements to solicit investors. HR 3606 would also remove SEC restrictions that prevent crowdfunding so entrepreneurs can raise equity capital from a large pool of small investors.

Moreover, the legislation amends SEC Regulation A, increasing the offering threshold for companies exempted from SEC registration from $5 million to $50 million. The legislation also removes barriers to capital formation for small companies by raising the shareholder registration requirement threshold from 500 to 1,000 shareholders. Similarly, the legislation increases the number of shareholders permitted to invest in a community bank from 500 to 2,000 without triggering SEC filing duties

The measure would create a new category of issuer, the emerging growth company, which would retain that status for five years or until it exceeds $1 billion in annual gross revenue or becomes a large accelerated filer. The House approved an amendment offered by Rep. Sheila Jackson-Lee (D-TX) adding a requirement that 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.

Meanwhile the House rejected an amendment offered by Rep. Jim Himes (D-CT), lowering the gross annual revenue cap from $1,000,000,000 to $750,000,000 for emerging growth companies to remain eligible for the regulatory on-ramp.

The House also rejected an amendment offered by Rep. Jackson-Lee that would have deleted language allowing an emerging growth company or its underwriter to communicate with institutions that are accredited investors. Opposing the amendment, Rep. Stephen Fincher (R-TN), a co-author of the regulatory on ramp provisions, said that HR 3606 allows emerging growth companies to test the waters only with sophisticated investors, which accredited investors are. Rep. Scott Garrett (R-NJ) noted that the accredited investor standard is an SEC standard and thus they are, by definition, sophisticated investors.

Similarly rejected was an amendment offered by Rep. Maxine Waters (D-CA) providing that if a broker or dealer is underwriting an initial public offering for an emerging growth company and providing research to the public about such IPO, those research reports need to be filed with the SEC, and the broker or dealer must be held to stricter liability for their comments. Rep. John Carnet (D-DE), an author of the on ramp provisions, said that the Waters Amendment was unnecessary because there already exists a number of investor protections in this area, citing Section 501 of Sarbanes-Oxley, SEC Regulation AC and the global Wall Street settlement, all of which would apply.

Section 501 contains provisions ensuring the objectivity of analyst research reports and requires disclosure of the extend to which the analyst holds securities in the company discussed in the research report. Regulation AC requires that research reports provided or circulated by a brokerage firm contain a statement attesting that the views expressed in the report accurately reflect the analyst’s personal views and whether or not the analyst will receive compensation in connection with the views or recommendations expressed in the report. The global settlement effected structural changes in the way business is done on Wall Street. For example, pursuant to the settlement, firms agreed to create firewalls between research and investment banking designed to prohibit improper communications.

HR 3606 would also remove the prohibition against general solicitation or advertising on sales of non-publicly traded securities, provided that all purchasers of the securities are accredited investors. The House approved an amendment offered by Rep. Kevin McCarthy (R-CA), these provisions, clarifying that general advertising under the provisions should only apply to Regulation D Rule 506 offerings, and allowing for general solicitation in the secondary sale of these securities so long as only qualified institutional buyers purchase the securities. The amendment also provides consistency in interpretation that general advertising should not cause these private offerings to be considered public offerings. According to Rep. McCarthy, the amendment ensures that more small businesses can find investors, while providing investor protection. It is designed to ensure that Regulation D Rule 506 meets its original intent.