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March 27, 2012
Congress Passes Most Significant Securities Offering Reform Bill Since Sarbanes-Oxley, Sends it to President Obama for his Signature
Executive Summary
On March 22, the Senate amended and passed by a vote of 73-26, H.R. 3606, the Jump-start Our Business Start-ups (JOBs) Act. Today, the House of Representatives followed suit, passing the bill by a vote of 380-41, and sending it to President Obama who has said that he would sign it into law.
The JOBs Act seeks to help start-up companies access the public markets by, among other things, allowing “emerging growth companies” to conduct initial public offerings of stock without being required to comply with certain Dodd-Frank and Sarbanes-Oxley financial disclosure and governance requirements; allowing for general solicitation of Regulation D offerings; raising the caps on assets and number of shareholders above which a private company must register with the Securities and Exchange Commission (SEC); raising the amount of capital that can be raised by Regulation A offerings; and by enabling internet crowdfunding.
A company would not be considered an emerging growth company (and therefore would still need to follow the Sarbanes-Oxley internal controls and other rules relaxed by the JOBs Act) if the first sale of common equity securities of such company pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.
Key Provisions
Reduces Disclosure and Governance Requirements for Emerging Growth Companies
The JOBs Act defines emerging growth companies as companies that have total annual gross revenues of less than $1,000,000,000 (indexed for inflation every 5 years) during its most recently completed fiscal year. A company ceases to be an emerging growth company at the earlier of the following: 1) after five years; 2) at the end of the fiscal year in which it exceeds this revenue threshold; 3) if it issues more than $1,000,000,000 in non-convertible debt over a three-year window; or, 4) if it is deemed to be a “large accelerated filer.”
Among other things, the JOBs Act provides that emerging growth companies: 1) will not be required to present any more than two years of audited financial statements for an initial public offering of its common equity securities to be effective and will not be required to present financial data for any period before the earliest audited period presented in connection with its initial public offering; 2) will be exempt from requirements for separate shareholder approval of executive compensation, including golden parachute compensation; 3) will not be required to comply with new accounting standards earlier than any later effective date provided for private companies; 4) will not be required to obtain an audit or the certification of the company’s internal controls by a registered public accounting firm; and, 5) will not be required to comply with any potential final rule issued by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation, unless the SEC overturns this exemption. The JOBs Act will allow any company to opt out of any of these exemptions.
Allows General Solicitation for Regulation D Offerings
The JOBs Act directs the SEC to adopt rules that would allow issuers and their brokers to advertise their Regulation D offerings to the public. The bill maintains the requirement that only accredited investors invest in Regulation D offerings, and it allows the SEC to require issuers to take reasonable steps – to be defined by the SEC – to verify that purchasers are accredited investors.
Raises the Shareholder Cap for Private Companies
The JOBs Act amends the Securities Exchange Act of 1934 to increase the thresholds for total assets and for holders of record above which a securities issuer must register with the SEC. The total assets threshold is raised from $1 million to $10 million, and the shareholders of record threshold is raised from 500 to 2,000 persons. Further, the JOBs Act establishes that the definition of "held of record" does not include shares held by participants in employee compensation plans pursuant to an exempt transaction.
Raises the Amount of Capital that can be Raised by Regulation A Offerings
The JOBs Act increases the potential size of “Regulation A” offerings by directing the SEC to exempt from regulation securities for which total value of all securities sold within the prior year does not exceed $50 million. This is an increase from the current limit of $5 million. This exemption is restricted to equity securities, debt securities, and debt securities convertible or exchangeable to equity interests, including any guarantees of such securities. Further, those securities exempted under these provisions of the JOBs Act will also be exempted from state regulation.
However, the SEC is authorized to require issuers of these exempt securities to: 1) make periodic disclosures available to investors; 2) electronically file with the SEC and distribute to prospective investors an offering statement to suspend or terminate this disclosure requirement for an issuer; and, 3) establish disqualification requirements, similar to those established by regulation as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Authorizes Internet Crowdfunding
The JOBS Act would allow small companies to engage in “crowdfunding” through the Internet or other means. Such activities would be limited to companies that file with the SEC, and who utilize this technique to raise no more than $1 million a year, or $2 million a year if they provide audited financial statements. Similarly, while non-accredited investors would be allowed to purchase a stake in the company, they would be limited to the lesser of 10 percent of their annual income or $10,000.
Outlook
Following the President’s expected signature as soon as this week, the JOBs Act calls for a number of regulatory actions. NAREIT will monitor these developments and will seek input from our members as we consider filing comment with the various regulatory agencies.
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