One year, 7 months, and 6 days have passed since President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The product of rare bipartisanship, the JOBS Act was praised on both sides of the aisle as improving access to capital for US small business, which could in turn drive economic growth. ((See House Passes Bipartisan Jobs Bill to Help Startups, Fox News (Mar. 8, 2012), http://www.foxnews.com/politics/2012/03/08/house-passes-bipartisan-jobs-bill-to-help-startups.)) While the JOBS Act has produced a steady wave of discourse regarding its potential effects, Securities and Exchange Commission (SEC) rulemaking, administrative implementation, and participation by Emerging Growth Companies (EGCs) has been protracted. ((See Sarah N. Lynch, Republicans Accuse SEC of Dragging Its Feet on JOBS Act, Reuters (Apr. 11, 2013), http://www.reuters.com/article/2013/04/11/us-sec-jobsact-idUSBRE93A0JB20130411.)) As a result, questions remain regarding the extent to which companies will take advantage of the new flexibility presented by these provisions and the effect that the JOBS Act will have on venture capital and private equity fund activity.
This two-part blog series will assess the JOBS Act 500+ days later within the lens of venture capital and private equity. Part 1 explores three provisions of the JOBS Act with significant potential to impact venture capital and private equity activity. Part 2 presents different opinions about the potential downstream effects of these provisions and analyzes existing data to gauge the current levels of activity.
The JOBS Act remains a work in progress, subject to further rulemaking, implementation, and adoption by industry. As a result, any analysis is necessarily incomplete and any prediction will necessarily be based upon a set of assumptions, but recent activity provides a basis from which to draw preliminary conclusions.
JOBS Act Titles I-VII create a new classification of Emerging Growth Companies (EGCs) and amend existing securities laws and regulations to promote access to capital. ((Press Release, The White House Office of the Press Sec’y, President Obama To Sign Jumpstart Our Business Startups (JOBS) Act (Apr. 5, 2012) available at http://www.whitehouse.gov/the-press-office/2012/04/05/president-obama-sign-jumpstart-our-business-startups-jobs-act.)) The provisions of the JOBS Act apply primarily to companies that meet the revenue test for an EGC. ((Id.)) An EGC is defined as an issuer with total annual gross revenue of less than $1 billion during its most recently completed fiscal year, as presented on the company’s income statement in accordance with Generally Accepted Accounting Principles (GAAP). ((See SEC Division of Corporate Finance, JOBS Act FAQs: Generally Applicable Questions on Title I of the JOBS Act (Sept. 28, 2012), available at http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm.)) Within the scope of analyzing impact on venture capital and private equity activity, the JOBS Act provisions create three notable changes to the process by which EMCs can access capital.
Initial Public Offerings
Title I of the JOBS Act creates a test-the-water process, allows confidential SEC review of draft registration statements, and relaxes disclosure rules for EGCs in the IPO process. ((See Latham & Watkins, A Review of the New IPO Playbook 5 (2013) [hereinafter Latham & Watkins Report] available at http://www.lw.com/thoughtLeadership/jobs-act-after-one-year-review-of-new-ipo-playbook.)) First, Section 105 of the JOBS Act allows EGCs to meet with Qualified Institutional Buyers (QIBs) and other accredited institutional investors to gauge interest in an offering. ((Jumpstart Our Business Startups (JOBS) Act, Pub. L. No. 112-106, § 105(c), 126 Stat 306 (2012).)) These test-the-water provisions broaden the scope of permissible communications through which potential issuers approach the market and create a new feedback mechanism between issuers and the market. ((Latham & Watkins Report, supra note 5, at 6.)) Second, Section 106(a) of the JOBS allows the confidential submission of a draft registration statement to the SEC for confidential non-public review. ((JOBS Act, supra note 6, §106(a), 126 Stat 306 (2012).)) The confidential review allows potential issuers to gather regulatory feedback from the SEC and isolate potential hurdles to pursuing an IPO. As of April 2013, approximately 150 EGCs have used the provisions for confidential review. ((Latham & Watkins Report, supra note 5, at 7.)) Third, Sections 102(c) and 103 relax the financial disclosure obligations through phase-in provisions that exempt EGCs from Sarbanes-Oxley Act internal controls requirements, allowing companies to go public using only two years of audited financial statements and two to five years of financial data, and postpone adoption of new accounting standards. ((Id. at 11-12.))
Lifting the General Solicitation Ban
Section 201(a)(1) of the JOBS Act requires the SEC to lift the prohibition on general solicitation or general advertising for securities offerings. ((See Press Release, Securities and Exchange Commission, SEC Approves JOBS Act Requirement to Lift General Solicitation Ban (Jul. 10, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539707782#.UkWcMGSDQUv.)) The JOBS Act provision does not limit whom an issuer can solicit but mandates that issuers take reasonable steps to verify that the purchases of securities are accredited investors. ((See Press Release, Securities and Exchange Commission, Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings (Jul. 10, 2013) available at http://www.sec.gov/news/press/2013/2013-124-item1.htm.)) SEC Rule 506, issued in July 2013, identifies an accredited investor as an individual with a net worth of more than $1 million at the time of purchase or an individual with an annual income of more than $200,000 in each of the two most recent years. ((Id.)) Issuers are required to take reasonable steps to verify the investor’s status as an accredited investor, judged at an objective standard. ((Id.)) The SEC also imposed new bad actor disqualification rules and has proposed rules requiring additional information from issuers to ensure adequate investor protection. ((See Press Release, Securities and Exchange Commission, Proposing Amendments to Private Offering Rules (Jul. 10, 2013) available at http://www.sec.gov/news/press/2013/2013-124-item3.htm.))
Title III of the JOBS Act creates a new exemption for the offering of crowdfunded securities when issuers offer and sell up to $1 million on securities. ((Jumpstart Our Business Startups (JOBS) Act, Pub. L. No. 112-106, §306, 126 Stat 306 (2012).)) Title III will allow non-accredited investors to invest in EGCs, which will provide a new influx of capital to the market. ((See SEC Division of Trading and Markets, JOBS Act FAQs: Generally Applicable Questions on Title I of the JOBS Act (May 7, 2012), available at http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm.)) While the implementation of crowdfunding provisions are still subject to SEC rulemaking, crowdfunding intermediaries must register with the SEC as a funding portal and meet a series of requirements regarding their activities. ((Id.))
With this simple exploration of the JOBS Act as a foundation, Part 2 will explore different opinions about the potential downstream effects of these provisions, with a focus on the impact on private equity and venture capital activity.
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