Orrick Alert: Jumpstart Our Business Startups Act – Implications for Issuers and Financial Institutions

On March 27, 2012, the U.S. House of Representatives adopted the Jumpstart Our Business Startups Act (the “JOBS Act”) with strong bipartisan support, sending the bill to President Obama to sign. The JOBS Act is intended to stimulate economic growth by improving access to the U.S. capital markets for U.S. and foreign startup and emerging companies. The President is expected to sign the JOBS Act into law this week.

Many business groups, including the U.S. Chamber of Commerce, support the JOBS Act and believe it will facilitate capital raising by small companies, allow emerging growth companies to make a transition to public company status while continuing to grow and create jobs, and reduce some of the regulatory burdens imposed by the Sarbanes-Oxley Act of 2002. While certain provisions in the JOBS Act will provide added flexibility to such earlier stage companies, its potential impact on the capital markets remains unclear. Many industry participants are concerned that the JOBS Act may erode investor protections and leave investors susceptible to securities fraud. In addition, because the JOBS Act did not alter the liability regime under U.S. securities laws, it remains unclear how market practices will change or develop for issuers and financial institutions. Such new market practices will depend, in large part, on the rules and guidance provided by the Securities Exchange Commission and other regulatory agencies such as the Financial Industry Regulatory Authority, which we will continue to monitor.

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The JOBS Act

On March 27, the U.S. House of Representatives approved the Jumpstart Our Business Startups Act (the JOBS Act). The Act had already passed the Senate and the President is expected to sign the Act shortly. The Act lifts the ban on “general solicitation and general advertising” for Rule 144A and certain Reg. D offerings, expands the Reg. A safe harbor limit from $5 million to $50 million and, in certain cases, raises the cap from 500 to 2,000 of the number of shareholders a company may have before it must register. The Act will also permit companies to raise up to $1 million in small amounts within any 12-month period without registering (“crowdfunding“). Finally, the Act creates the concept of an “emerging growth company” – generally companies with annual gross revenue of less than $1 billion – and relieves these companies from certain provisions of the Dodd-Frank Act and Sarbanes-Oxley Act. Most of the Act’s provisions, including the changes to Rule 144A and Reg. D, will become effective upon the effectiveness of rules to be adopted by the SEC.  Full text of the Act could be found here.