On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act or JOBS Act. In light of the sharp decline in the number of companies entering the U.S. capital markets through IPOs over the last ten years, Congress recognized a need for this legislation since small companies are critical to economic growth and job creation. To promote growth and assist small companies in gaining access to capital, the JOBS Act amends the securities laws in several ways, which include the following:
(i) Establishes a new category of issuers known as “Emerging Growth Companies” (EGCs) which are issuers that have total annual gross revenues of less than $1 billion (after December 8, 2011). EGCs are exempt from certain regulatory requirements until the earliest of the date (a) five years from the date of their IPO, (b) they have $1 billion in annual gross revenue or (c) they become a large accelerated filer (i.e. a company with worldwide public float of $700 million or more);
(ii) While EGCs must comply with SEC-mandated quarterly and annual disclosures, they would be exempt from Section 404(b) Sarbanes-Oxley requirements regarding auditor attestations of management’s assessment of its internal controls, for a transition period of up to 5 years. EGC management would still need to establish and maintain internal controls over financial reporting and its CEO and CFO would still need to certify the company financial statements;
(iii) Allows EGCs to provide audited financial statements for the two years prior to registration rather than three years. Within a year of an IPO, the EGC would report three years’ worth of financial statements;
(iv) Provides exceptions to rules on mandatory audit firm rotation;
(v) Exempts EGCs from certain requirements under Dodd-Frank legislation such as the say on pay requirements and disclosure of median compensation ratios of all employees compared to the CEO. EGCs would still comply with corporate governance and listing requirements including board member independence rules;
(vi) Provides for more communications and information flow to investors and special provisions for providing draft registration statements for non-public review. On April 10, 2012, the SEC Division of Corporate Finance issued FAQs addressing questions relating to the confidential submission of registration statements;
(vii) Provides special exemptions in connection with solicitation and advertising to accredited investors;
(viii) Establishes new thresholds for registration; and
(ix) Sets forth special rules for a “Crowdfunding” exemption-Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure. This allows for aggregate sales to all investors up to $1 million using web-based platforms (up to the greater of $2000 or 5% of the annual income/net worth of such investor (with additional requirements)).
Start-ups and emerging growth companies should take the time to explore the JOBS Act and the related guidance being issued. The new law may address a particular hurdle previously faced which would allow certain companies to move forward and grow.