The Jumpstart Our Business Startup Act more commonly known as the JOBS Act was passed and sighed into law by President Barack Obama in April 2012 with a focus of easing security regulations and encouraging funding for smaller American Companies. In an effort to achieve the act's overall goal, there were six titles in the new legislation, and a seventh calling for the Securities and Exchange Commission to provide online information and conduct outreach to communicate the changes made by this Act.
Title I: Reopening American Capital Markets to Emerging Growth Companies
Title I of the jobs act effectively created the Emerging Growth Company (EGC), a new class of company that is distinguished by an annual gross of under $1 Billion in its most recent fiscal year. Any company that sold securities prior to December 8th 2011 when the JOBS Act was enacted into law cannot be considered an EGC, and therefore cannot gain from the exemptions. The benefits of the Emerging Growth Company designation are getting relief from aspects of initial registration requirements and an equity offering as well as reporting requirements. A company can keeps its designation a an EGC until the earliest of the following:
Until the last day of the fiscal year where the companies annual gross is over $1 Billion.
Until the last day of the fiscal year following the 5th anniversary in accordance with the registration requirement.
Until the date the issuer deemed to be a large accelerator filer, which normally happens with a market capitalization of over $700 million.
The date when the issuer has more then $1 billion in non-convertible debt during the last 3 years.
There are many advantageous changes that the EGC distinction gives issuers particularly in the IPO registration process as well as some post-IPO changes. Below summarizes the beneficial aspects of the EGC distinction in contrast to the prior regulations.
Changes in the IPO Registration Process for Emerging Growth Companies
2 years of audited financial statements in contrast to the previous 3 years of audited statement.
2 years of selected financial data in contrast to the five years of selected financial data.
Complying with new accounting standards in the same time frame as a private company in contrast to the accounting standards for an issuer.
Having an option for confidential treatment available in contrast to the registration statement publicly filed.
Changes in the post-IPO Process for Emerging Growth Companies
Financial data is only required for the years starting with the earliest auditing period including the initial registration statement.
There is no auditor attestation required in contrast to the previous compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Exemption from prospecting PCAOB regulations with regards to changes in auditor reporting and auditor rotation as well as future SEC regulation in contrast to compliance with future PCAOB regulations.
More limited disclosure requirements for smaller reporting companies as well as exemption from certain current and prospective compensation disclosures in contrast to compliance with all current and future compensation disclosures.
Title II: Access to Capital for Job Creators
Regulation D of the Securities Act of 1933 is the exemption that allows job creators to bypass the Securities Act’s overall goal of requiring that all securities need to be registered. Regulation D gives an exemption, which limits the size of the offerings as well as the number of investors for small private companies. Title II also requires the SEC to eliminate its ban on general soliciting and advertising in the offerings that are exempt from registration. The SEC has to eliminate the ban under rule 506 of Regulation D, if all the investors are accredited or under rule 144A as long as investors are qualified as institutional buyers. In order for this to be successful the issuer has to take reasonable steps to determine if the issuer is accreted and the SEC is then required to issue riles within 90 days.
Title III: Crowdfunding
Title III provides the explanation of the registration exemption for limited size offerings to be sold in small amounts to large amounts of investors. This opens up the ability for theses offerings to sell over the Internet and other platforms. Previously, this existed in a manner where the return to investors was in the form of goods and service. With the implementation of the JOBS Act the SEC has 270 days to formulate rules in regards to Title III.
The issuer is only permitted to sell $1 million in securities over a 12-month period provided that they met all the requirements of the initial and periodic disclosures to the SEC.
Any individual investing cannot purchase more then $2,000 or a percentage of such investors annual income or net worth up to a maximum of $100,000.
Title IV: Small Company Capital Formation
Title IV is based off regulation A, which is an exemption that allows small companies to offer shares to the public through general solicitation without the regulations that are placed on an initial public offering. The title effectively increased the amount of capital that can be raised from $5 million to $50 million. Once the JOBS Act was enacted into law it required the SEC to take action and do some rulemaking as well as requiring the U.S. Comptroller General to study the impact of the state securities regulations on public offering companies within 90 days of the enactment.
Title V: Private Company Flexibility and Growth
Title V raised the threshold for mandatory registration. Previously the 1934 Securities Acts required that an issuer with over $10 million in assets as well as having over 500 shareholders register with the SEC. With the JOBS Act the threshold has been raised to 2,000 as long as fewer than 500 of the shareholders are non-accredited investors. They make the distinction that investors who receive shares through employee compensation or crowdfunding are excluded from the overall shareholder count.
Title VI: Capital Expansion
Title IV expands the threshold for mandatory shareholders for investors for a bank or bank holding company from 500 to 2,000. Unlike issuers, there is no limitation for non-accredited investors. It also raises the threshold for banks or bank holding companies to terminate its registration from 300 shareholders to 1,200 shareholders of record. There were no changes made in the JOBS Act to the threshold for terminating the registration for an issuer that isn’t a bank or bank holding company.