As discussed in the first interview with Congressman David Schweikert (R-AZ), The Jumpstart Our Business Startups Act is a major step in addressing one of the most critical components of the U.S. economy. If the White House and Capitol Hill—and for that matter Wall Street and Main Street—ever hope to get job growth in the U.S. back to where it needs to, then addressing the things that are holding back small businesses, entrepreneurs, and innovators of new technology as they try to grow is paramount.
The JOBS Act is a major effort in that direction. In this interview, we speak with David Feldman, Partner at Richardson & Patel, as he breaks down some of the major provisions of the new law and how it may affect the future of the American economy. Feldman’s experience includes a wide range of corporate securities matters in public and private companies, and is an active voice in the media discussing topics such as financings, mergers and acquisitions, private equity, and more. He has also been closely covering the JOBS Act on his award-winning Reverse Merger & SPAC Blog.
EQ: The JOBS Act was positioned as a way to help the economy recover and to ultimately add more jobs for Americans. Most of the provisions involve how small companies can access capital. How does that translate and impact everyday Americans?
Feldman: The theory is that small business is the engine of our economy. It produces 75 percent to 80 percent of all jobs, especially new jobs, and those jobs are created through the growth of the business or the business raising capital. So these changes were meant primarily to make it a little easier for smaller companies to raise capital, and if they can raise capital, they can then deploy that to new plans and new opportunities, which then leads to new employment.
EQ: There has been a concerted effort in the industry to create more dialogue and awareness regarding issues and changes from the JOBS Act. What are some of the higher level points to the new laws that you think will be impactful?
Feldman: Any time the pendulum swings more towards improving access to capital rather than reducing it, that’s positive news to me, especially when it comes to small businesses. Also, I think the actual on-ramp provisions provide a very helpful reduction in hassle and costs in doing an IPO. The removal of the ban on general solicitation in private offerings is a major plus for people looking for a variety of different ways to get interest in their offering. Crowdfunding is going to be, I think, an exciting way for startups and very early stage companies to finally have a way to do a more broad-based offering to raise money for themselves.
There are other changes in the act such as increasing the number of shareholders that you would meet before being forced to go public. One of the challenges that growing companies faced was that as they gave stock to employees, investors and others, they were ultimately forced to go public because they were approaching the 500 shareholder limit. The fact that the limit has now increased to 2000 allows other companies to choose to stay private longer. That’s also a very positive benefit.
Finally, little talked about is the change to Regulation A that is proposed in the bill. We’re waiting for the SEC’s proposals on that. Here you can do a simplified mini-IPO, not in terms of dollars—though now limited to $50 million—but essentially with a question-and-answer type of form that is reviewed by the SEC. You could complete a public offering and issue people shares that they can trade. Congress has provided what appears to be a path not only for the amount of money they can raise to go up from $5 million to $50 million, but even more importantly, an ability for offerings to take place without state review of those offerings.
Many people stayed away from Reg A as an alternative to an IPO because the state reviews of these offerings were extremely burdensome, time consuming, and difficult. The SEC has said if you sell only to “qualified purchasers”, which is a term that the SEC itself will have to define, then you can be pre-empted from that state review, which can be very significant for smaller companies that don’t otherwise get the benefit of that pre-emption that you get on the national securities exchanges.
EQ: The JOBS Act was signed into law in April, but many of the main points are still in the process of regulatory discussions. Have there been any significant changes or developments to the provisions?
Feldman: Much of the structure of the IPO on-ramp that they've talked about is now in place and not requiring further rule making. In particular, a company doing an IPO for example can now confidentially file their IPO registration, go through rounds of comments at the SEC without the public knowing about it, and they’re only required to notify the public about these filings 21 days before their first road shows. This gives companies that are uncertain about whether or not they definitely want to go public the opportunity to get through the process at the SEC before making that final decision that alerts their competitors and others that they’re considering this. So this is a positive development.
In addition, the new rules about easing of the restrictions on analysts and research is also already in place. So that in many cases now, an analyst can actually appear at a road show and meet with investors and have an investment banker make those arrangements, which was not previously permitted. In addition, research can also be released immediately prior and immediately after the public offering, which was not allowed before the JOBS Act. Finally, the provisions of the law that ease restrictions on what are called “emerging growth companies” are also in place. Companies going public now with under $1 billion in revenues can release two years of audited financials instead of three. These companies are also exempted from hiring an outside auditor to attest to the adequacy of their financial controls. These additional rules have made it more attractive to consider going public, and in particular to a public offering.
EQ: Crowdfunding seemed to be the provision that most people gravitated toward. The financing technique has garnered a lot of buzz, but mainly because of its social nature. Is there a lot of demand from small and emerging growth companies to tap into this type of funding in the future?
Feldman: I think the amount of demand will depend in part of what the rules look like that the SEC chooses to write. The new crowdfunding law already has some restrictive elements to it that may make some to consider if it is worth the hassle to go through it. In particular, there’s a limit of $1 million that you can raise in a crowdfunding transaction, and if you raise anywhere above $500,000, you have to go through a full audit of your financial statements. That alone may make some people to choose not to participate. That being said, for the early stage and startup companies, it can be a very interesting alternative to not have to worry about finding only wealthy and sophisticated investors, but being able to go to customers and friends and neighbors and ask if they would like to put a few hundred or a few thousand dollars into your company without worrying about running afoul of the SEC restrictions on going to lots of people in a securities offering.
EQ: Another significant impact that the JOBS Act will have is expediting the process for smaller companies to go public as well as reducing costs associated with regulatory filings. While large IPOs have dominated the market, the number of smaller IPOs has dried up over the years. Why is addressing this issue vital to the public markets and the economy?
Feldman: It may not lead to a sudden, dramatic surge in IPOs going from the low hundreds back to the 500-a-year level that they saw in the late '90s. Since that time we've also gone from 90% of IPOs raising less than $50 million to around 10% of IPOs raising less than that amount. But anything that limits or reduces restrictions on companies is a positive thing. So the fact that you don’t have to go back a third year and do an audit, and the fact that you can decide to go through confidential filing with the SEC, it creates a big cost savings that applies when you don’t have to hire an outside auditor to review your financial controls. These are all positive things. I don’t know if they alone would be the difference between a company choosing to go public or not, but in the end, any company considering this needs to answer two simple questions. Can I benefit from being publicly held? And can I handle the costs of doing so? If the answer to both questions is yes, then it is something you should seriously consider.
EQ: The issue of the SEC lifting the ban on general solicitation on Reg D offerings is another major ongoing discussion. While there’s a definite need to help emerging growth companies and small businesses access the capital markets, investors also need to be protected from risks of potential financial fraud. How do you strike that balance?
Feldman: I think the way Congress and the SEC is going about striking the balance on this issue is an excellent one. There previously was a ban on advertising and general solicitation in certain types of Reg D offerings, and that mattered whether you were going to accredited investors or not. In this electronic age where you would want to have the ability to promote something on the internet or send a huge email blast or something like that, it didn't seem to make sense that that this ban on general solicitation should apply for everyone regardless for who the investors are. Sure enough, in what I consider to be potentially the biggest sleeper provision of the JOBS Act, they’re now saying that as long as you limit your investors to people who fit the definition of being accredited, then we don’t mind that you go ahead and do general solicitation because the SEC’s view is that they’re not really there to protect wealthy individuals and that those people have the ability to protect themselves.
EQ: How has the explosion of social media, and the internet in general, played a role in the way the market and regulators view solicitation?
Feldman: What it’s going to impact on is how do you confirm that somebody’s actually accredited, and the proposed rule the SEC came out with about a month ago tried to address that by saying we’re not going to have a specific set of ways that you can determine if somebody’s accredited. We’ll give you some suggestions on things that will look good in determining whether somebody’s accredited, but in the end, each company will have to determine for itself whether they've taken reasonable steps to confirm accredited status. In the past, we've kind of relied on a statement from individuals that they’re accredited as well as some kind of pre-existing relationship either with the company or their placement agent indicating that they are wealthy. Now, if somebody responds to your advertising offering, you won’t have a pre-existing relationship with them. So it’s not yet clear what will be sufficient for a company to be comfortable that an investor is accredited.
The SEC did make clear in their proposal that it is not going to be enough to simply have somebody to sign a check-the-box statement that says how they’re accredited without additional information that the company has to verify that they are accredited. This has caused some in the bar to say that it is a great concern and we need to have greater clarity as to what more will be sufficient. I think different people are going to develop different thoughts and techniques on that, and people will be submitting comments to the SEC on these proposals. It’ll be interesting to see how the final rules come out, although some are saying that may not happen until next year.
EQ: You are one of the key panelists on an upcoming webcast to discuss topics surrounding the JOBS Act. Can you discuss some of the other participants that you will be engaging discussions with?
Feldman: In addition to myself, we have Neal Wolkoff, who just joined Richardson & Patel as Of Counsel. He is the former chairman of the AMEX, and is obviously a very prominent fellow. He’s very well-versed in a lot of these issues, and very plugged into the regulatory environment. We know he will bring a very interesting perspective having been on the other side working with companies that are listed on national exchanges.
Congressman David Schweikert of Arizona has been one of the main leading proponents and drivers of the JOBS Act. I was privileged to work with his staff on aspects of the bill. I saw how determined and driven they were. This took a long time. It started with one small bill that was one aspect of it, and it turned into seven or eight bills that had different pieces of the puzzle. They finally realized the benefit of putting it all together in one bill. Amazingly it sailed through Congress with strong bipartisan support and immediately signed into law by the President. Congressman Schweikert was really a phenomenal leader for someone who was new to Congress in really making this bill go through.
David Weild is another prominent gentleman that will be participating. He has spoken at SEC conferences and has testified in Congress. He’s a very outspoken guy talking about some ways of bringing back a stronger IPO market. His focus is on essentially increasing the minimum tick sizes and spreads between the bid and ask as a way to encourage more players to come back into the fold of the small cap market. This is something a lot of people are talking about now. The SEC, at least initially, has recommended against doing that but they left the door open for further study, which is good. David is a tremendous speaker and I am excited to be on another panel with him.
I’m very excited about the panel. I think it’s very rare to get these types of brains together at one place and for me to be a part of it is exciting. I really think it’s important for the public and broader Wall Street to have a really strong understanding of what opportunities lie from the passage of this bill.
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