Earlier this month, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act, which had strong bipartisan and business support, is aimed at stimulating economic growth by allowing U.S. and foreign startup and emerging companies to more easily raise capital and transition to public companies.
The JOBS Act works by reducing a number of regulatory burdens that were imposed by the 2002 Sarbanes-Oxley Act. It directs the Securities and Exchange Commission to revise Rule 506 under the 1933 Securities Act to allow general advertising and solicitation for private placements, with no limit on the number of securities that are bought and sold, so long as they are sold only to accredited investors. It also amends Rule 144A(d)(1) of the Securities Act, which allows private resales of securities to qualified institutional buyers (“QIBs”), to permit such securities to be generally advertised to persons other than QIBs—as long as they are only later sold to QIBs. These changes have the effect of allowing firms to market themselves to a greatly expanded base of potential investors.
The JOBS Act also encourages fundraising by startup and emerging firms by including a “crowdfunding” exemption that permits issuers to sell up to $1,000,000 in securities in small increments to a large number of investors. It also increases the cap on private shareholders under the 1934 Securities Exchange Act from 500 shareholders to 2,000 shareholders and permits Wall Street analysts to publicize the stocks of their investment banking department’s clients while an IPO is in progress. Importantly, the JOBS Act does not alter banks’ current requirements to maintain separation between investment and research segments.
Filing and reporting requirements for companies with annual gross revenues of under $1 billion have also been relaxed. As a result, the costs of an initial public offering will be lower for such “Emerging Growth Companies.” Among the loosened requirements are a reduction in the amount of financial information to be included in SEC filings, the option to request a confidential review by the SEC of draft registration statements, and exemption from the requirement of an auditor’s attestation regarding the company’s internal controls, compliance with new accounting standards, and disclosures regarding executive compensation.
Though the JOBS Act has strong support from Congress and from the startup and emerging company communities, others, including SEC Chairman Mary Schapiro, have expressed concerns that the Act will lessen investor protections and invite fraud. Although the JOBS Act does not alter liability under the U.S. securities laws, it will allow a greater variety of communications with potential investors while at the same time reducing the amount of information available to investors about the issuer. Enforcement officials may be looking for early opportunities to demonstrate that they remain tough on fraud as issues arise with investments under the Act.