Title I: Reopening American Capital Markets to Emerging Growth Companies
Title I of the JOBS Act contemplates those businesses that are at the stage where they are preparing to become publicly-traded and owned. If these businesses have less than $1B in revenues over the previous fiscal year, they are classified as “emerging growth companies” (EGCs) and gain a number of privileges and exemptions under the JOBS Act. These changes are designed to make the process of an initial public offering (IPO) less arduous from a regulatory standpoint. For example, the SEC now requires two years of audited financial statements, instead of the previous three years, for a business’ IPO registration statement if that business qualifies as as EGC. The same relaxed two-year requirement applies to management discussion and analysis disclosures that are also required by the SEC. Producing these disclosures is both time-intensive and costly so decreasing the requirement from three years to two years is helpful to businesses at this stage.
Other areas with relaxed requirements include executive compensation disclosures; auditor attestation reports (under the Sarbanes-Oxley Act); compliance with new accounting standards; submission and review of SEC registration requirements; restrictions on the publication of analyst research and communications; and, pre-filing communications with qualified institutional buyers.
Whereas Title I addresses public offerings by emerging growth companies, Title II focuses on private offerings. Prior to the passage of the JOBS Act, businesses looking to raise capital through private investments were prohibited from publicly advertising their offerings (also known as ‘general solicitation’). Additionally, purchasers or investors were largely required to be qualified institutions or accredited investors. Title II has eased restrictions on the mass marketing of private offerings. Businesses are now able to engage in large-scale marketing of private securities offerings, including the use of social media, provided they take steps to ensure that purchasers are accredited investors.
Title III: Crowdfunding
Perhaps the most well-known title of the JOBS Act, Title III is the section of the law that legalizes the sale of private securities to non-accredited investors by crowdfunding. In addition to allowing businesses to sell their equity by crowdfunding processes, the legislation lays out investment caps for both purchasers and businesses. A business can sell up to $1M of securities per year through crowdfunding and purchasers are subject to annual caps based on their income or wealth. These offerings must be made via an SEC-registered funding portal or broker-dealer. Title III imposes restrictions on the marketing of these types of offerings and also addresses potential liability issues for businesses choosing to raise capital in this manner. However, by and large, Title III aims to create a relatively easy and inexpensive way for businesses to raise capital through the sale of private securities to non-accredited investors.
Title IV: Small Company Capital Formation
Title IV, popularly known as “Regulation A+,” essentially expands a previously-existing SEC exemption (Regulation A). Regulation A allowed businesses to sell securities to the public without a full IPO as long as state securities laws were complied with wherever solicitation occurred. Regulation A imposed a number of SEC filing requirements on businesses choosing to take advantage of the exemption but the process was far less burdensome than a full IPO. Many viewed the state compliance provision as a major hindrance because state laws can vary widely and compliance can be costly. Under Title IV, businesses can now offer up to $50M (as opposed to $5M under Regulation A) in securities offerings and they can advertise and sell such offerings publicly (including via online crowdfunding portals). Regulation A+ creates two tiers of offerings (Tier 1 for up to $20M in offerings and Tier 2 for up to $50M) and SEC registration and offerings requirements for Tier 2 will preempt state law requirements meaning that Tier 2 businesses will only have to comply with SEC requirements.
Title V: Private Company Flexibility and Growth
In an effort to provide companies with more room for growth and flexibility, Title V of the JOBS Act increases the threshold at which a business must begin public reporting. Previously set at 500, businesses must now register with the SEC if they reach 2,000 shareholders or 500 non-accredited shareholders. This change allows private companies to remain private for a longer period of time, to raise more money from private investments and to go public as a more mature business (if they eventually decide to go public).
Title VI: Capital Expansion
Similar to Title V, Title VI increases the threshold at which banks or bankholding companies must begin public reporting and SEC registration. The threshold is now 2,000 shareholders, up from 300. Banks and bankholding companies can deregister and cease SEC reporting if the number of shareholders decreases to 1,200.
Title VII: Outreach on Changes to the Law
The full text of Title VII reads as follows: “The Securities and Exchange Commission shall provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by this Act.”
The JOBS Act is a large and complex package of laws and some of the sections required further rulemaking by the SEC before they would be effective. Titles I, V and VI were effective upon enactment. Title II became effective in September 2013. Title IV went into effect in June 2015. Final regulations for Title III are expected some time this month (October 2015).
The JOBS Act contains a number of provisions designed to give small and emerging growth companies more financing options. While the full effect of this legislation is yet to be determined, many remain optimistic that the updates to the securities laws will be positive and effective in encouraging the success of small businesses.