As many of you may have heard, the U.S. Senate and House of Representatives each passed the Jumpstart Our Business Startups (or JOBS) Act in the last several days and sent it to President Obama for his signature, which is expected later this week (likely Thursday).
As I described in a prior post, the JOBS Act is actually a “roll up” of several pieces of legislation relating to early stage capital raising and opening the U.S. IPO market. The legislation that passed in both the House and Senate has been amended from the original pieces of legislation passed by the House that I described in another earlier post last November.
You may be wondering how this significant legislation (more on that in a moment) made its way through Congress and passed with strong bipartisan support, especially when there is so much gridlock in Washington. It certainly has something to do with people realizing that many emerging companies, the lifeblood of our economy, are starving for early stage capital and that the IPO market has been stagnant.
Could it also be related to the clever “JOBS” acronym?
Of course jobs will be created by improving access to capital for emerging enterprises. However, unlike some legislation aimed directly at job creation and “shovel-ready” projects, the JOBS Act is really about access to capital markets for emerging enterprises (an indirect approach). But calling it the JOBS Act must have made it easier to garner votes…after all, who would want to be standing for re-election saying that they voted against the “JOBS Act,” especially in the current economy?
As for the legislation, I think it is pretty clear that there is a lot of SEC rulemaking and guidance to come before we know what it really means and what the impact will be. Assuming the president signs it, here are a few things I’ve learned that should be most interesting to entrepreneurs:
- Title II, which I still think has the biggest potential to be a game changer for my typical entrepreneurial clients who are raising capital, eliminates the prohibition on general solicitation (Internet, radio, advertisements, etc.) in a Rule 506 offering (ask your lawyer if you don’t know what that means), as long as you ONLY allow “accredited” investors to invest. You also need to take reasonable steps to verify (whatever that means) accredited status; I guess we’ll learn when the SEC adopts rules telling us. Hopefully, this will enable entrepreneurs who aren’t well connected to find legal means to reach new potential investors. I wouldn’t rush out and purchase air time on local late night cable TV to advertise your offering just yet because these provisions won’t take effect immediately—they require SEC rulemaking (within 90 days).
- There are also some provisions in Title II that, on their face, seem interesting (especially in light of the recent focus on finders detailed by my colleague, Frank Vargas, in his recent post) because they exempt certain individuals who assist in offerings from broker-dealer regulation. Before all the “finders” out there get too excited, the language is pretty narrowly tailored to codify previous SEC guidance regarding matching services. You still can’t legally get paid transaction-based compensation or be actively involved in documenting and/or negotiating the terms of an investment.
- Believe it or not, someone in Washington was clever enough to come up with the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act,” or CROWDFUND Act. Another creative acronym, huh? While much focus has been placed on this legislation because of the desire to permit early stage companies to access small amounts of capital from large groups of investors using the Internet, there are many hoops to jump through (and at least 270 days worth of rulemaking by the SEC) before it might make sense for a company to give it a try. Maybe all you need to know is this: you won’t be able to do it without the assistance of a skilled securities lawyer (and, depending on the amount you’re raising, an independent CPA). Certainly more to follow on this subject in future posts as the rules are adopted.
There’s a lot more in the JOBS Act (too much to detail in a single post). Much of what remains has to do with access and reporting to the public capital markets.
Here’s a brief summary of some of what remains:
- Title I is designed to make it easier for companies to test the waters (and confidentially get feedback from the SEC) prior to actually launching an IPO. It also lowers the reporting obligations for “emerging growth companies” (which, believe it or not, means those who have revenue of less than one billion in annual gross revenues) for a period of time after public offering. Bad news for companies that are “emerging” and already public—the Act only helps if you became public after December 8, 2011.
- There are provisions that increase the amount that can be raised under “Regulation A” (again, ask your lawyer) in an attempt to increase its utility. This should be easy to accomplish because there have been so few. Other provisions deal with the interaction between the new law and state regulation of (and enforcement relating to) offerings.There are provisions that increase the amount that can be raised under “Regulation A” (again, ask your lawyer) in an attempt to increase its utility. This should be easy to accomplish because there have been so few. Other provisions deal with the interaction between the new law and state regulation of (and enforcement relating to) offerings.
- Finally, the law increases the number of shareholders a private company can have before being required to become a “reporting company” under SEC rules. The new number is 2,000 total or 500 non-accredited (not sure about the logistics of confirming accredited status but maybe a year-end questionnaire when the question is relevant); you also get to exclude from counting any shareholders who bought under the CROWDFUND Act or under an employee plan.
The Heartfelt Expiration of my Editorial News Discourse…