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What you need to know • The JOBS Act would ease some of the regulatory requirements on companies
seeking access to capital from both the private and public markets.
• The Act would create a new category of issuer called an emerging growth
company that would be able to offer stock through an IPO and phase-in
certain SEC reporting requirements.
• Private companies would get greater access to funding without triggering
public reporting requirements. The Act would increase the shareholder
threshold for mandatory registration and expand Regulation A offerings up
to $50 million.
• The Act would allow private companies to raise money through crowdfunding
in certain circumstances.
Overview A bill that would give private companies greater access to capital and ease the
regulatory requirements for certain companies seeking to go public is close to
becoming law.
The US House of Representatives, which already approved a version of the bill, is
expected to approve a similar bill next week that the US Senate approved on
Thursday in a 73 to 26 vote. President Barack Obama is expected to sign the
legislation into law shortly thereafter.
The legislation, called the Jumpstart Our Business Startups Act (JOBS Act or the
Act), would represent a major change in how private companies can access capital
through either the private or public markets.
No. 2012-07
23 March 2012
To the Point
JOBS Act to promote capital formation
Congress is trying to
boost job creation and
economic growth by
giving emerging growth
companies and private
companies greater access
to capital.
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2 23 March 2012 To the Point JOBS Act to promote capital formation
IPO on-ramp for emerging growth companies The Act would create a new category of issuer called an emerging growth company
(EGC) to encourage initial public offerings (IPOs). An EGC would be defined as an
issuer with annual revenues of less than $1 billion in its most recent fiscal year.
A company would be eligible for EGC status for five years after its IPO, but would
cease to qualify earlier if it (1) issued more than $1 billion in non-convertible debt in
a three-year period, (2) became a large accelerated filer (i.e., market capitalization
greater than $700 million) or (3) had annual revenues exceeding $1 billion.
The Act would exempt an EGC from the following requirements during the
on-ramp period:
• Having an independent auditor assess its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act. However, an EGC
would still have to comply with the Section 404(a) requirement that
management assess its internal control over financial reporting, generally
beginning with its second annual report on Form 10-K.
• Providing more than two years of audited financial statements in its IPO
registration statement (i.e., 1933 Act Registration Statement). In post-IPO
annual reports, an EGC would need to include the same number of periods as
non-EGC issuers (i.e., three years of audited financial statements unless the
company is eligible for relief as a smaller reporting company).
• Presenting selected financial data in its registration statements or periodic
reports for any period before the earliest audited period in its effective IPO
registration statement.
• Adopting new or revised accounting standards effective for public companies.
Effective dates for private companies would apply.
• Complying with “say-on-pay” vote requirements under the Dodd-Frank Wall
Street Reform and Consumer Protection Act. An EGC would satisfy executive
compensation disclosures in a manner consistent with a smaller reporting company.
• Restricting certain communications with accredited investors or qualified
institutional buyers before a securities registration and communications
between an EGC’s broker dealers and potential investors.
• Complying with future changes to PCAOB auditing standards related to
mandatory audit firm rotation and an Auditors Discussion & Analysis statement
(if adopted). Other new standards would not apply to audits of EGCs unless the
SEC decides that they should after considering the protection of investors and
whether the action will promote efficiency, competition and capital formation.
In a major change from current practice, EGCs would be able to submit IPO registration
statements and amendments to the SEC on a confidential basis. The SEC staff would be
able to comment and the company would be able to respond before the company files
publicly through the EDGAR system. The EGC would be required to publicly file its initial
public submission and all amendments no later than 21 days before a road show.
How we see it Some companies may accelerate their IPO plans because they would be able
to first test the waters regarding their disclosures without publicly disclosing
financial information.
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3 23 March 2012 To the Point JOBS Act to promote capital formation
An issuer that completed its IPO on or after 8 December 2011 could qualify as an
EGC, but the JOBS Act would permit any new EGC to forgo an exemption and
comply with the requirement of a non-EGC. However, if an EGC elects to comply
with the accounting standards of a non-EGC it would have to:
• Elect that option when it is first required to file with the SEC
• Comply with all updated accounting standards applicable to non-EGCs (i.e., it
couldn’t opt in and opt out on an update-by-update basis)
How we see it A company that qualifies as an EGC would have to evaluate its likely exit timing
and determine whether it should opt in or out. We expect that transition
guidance would be needed to help companies weigh their options.
Triggers for public registration and reporting The Act, by amending Section 12(g) of the Exchange Act, would increase the
number of record holders that trigger a company’s obligation to register and report
as a public company to 2,000 people (or 500 people who are not accredited
investors) from 500 people. For an issuer that is a bank or bank holding company,
the trigger would be 2,000 people, even if none are accredited investors. To
provide further relief, the definition of a record holder would be amended to
exclude (1) individuals who received the securities through an employee stock
compensation plan that is exempt from registration and (2) holders of securities
issued through permitted crowdfunding (see discussion below).
In addition, the Act would raise the threshold below which a bank or bank holding
company may terminate registration and suspend its reporting obligation to
1,200 record holders from 300. The threshold of 300 record holders for non-banks
and non-bank holding companies would remain unchanged.
How we see it The Act would give private companies more flexibility to issue stock to employees
as compensation because these shareholders would no longer be counted among
record holders who could trigger public registration. Private companies may
consider revising employee compensation plans to better align company
objectives and compensation.
Other Act provisions The Act also includes the following provisions to encourage capital formation:
• Companies would be allowed to raise equity capital from a large pool of small
investors (e.g., through the internet) through crowdfunding without adding to
the record holder count if certain conditions are met, including:
• Sales within a 12-month period are limited to $1 million
• Financial statements are filed with the SEC, including management certification
or independent auditor review or audit based on the size of the offering
Modifications to
Section 12(g) of the
Exchange Act would allow
some companies to avoid
or suspend registration
and reporting as a
public company.
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4 23 March 2012 To the Point JOBS Act to promote capital formation
• Sales to any individual do not exceed (1) for an investor with annual income
or net worth less than $100,000, $2,000 or 5% of annual income or net
worth or (2) for an investor with annual income or net worth equal to or
greater than $100,000, 10% of annual income or net worth subject to a
cap of $100,000
• The threshold for offerings exempt from SEC registration under Regulation A
would rise to $50 million from $5 million raised over a 12-month period through
issuance of equity securities, debt securities or debt securities convertible or
exchangeable to equity interests, including any guarantees of such securities
• The ban on general solicitation in Regulation D offerings under Section 506
would be lifted, allowing companies and their brokers to advertise and solicit
accredited investors
What’s next? The Act would require the SEC to take a number of actions, including identifying
ways to simplify Regulation S-K for EGCs, studying whether to designate a minimum
increment for trading and quoting EGC securities and revising rules to eliminate the
prohibition against general solicitation or advertising under Regulation D for offers
and sales of securities if all purchasers are accredited investors.
How we see it By easing some reporting requirements and giving EGCs access to capital, the
Act could help create a more favorable environment for entrepreneurial growth.
At the same time, concerns exist that some provisions of the Act could
undermine investor protection, and therefore investor confidence. Investors
may demand a risk premium for investing in EGCs and accepting less protection.
Companies should consider the effect these changes have on their immediate
and long-term capital needs in accessing the private or public market.
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