After a flurry of news articles when the JOBS Act became law in April, the news cycle has been non-stop election coverage. While we all look forward to the end of the political advertisements (especially us Floridians), I wanted to take a moment to bring you up to date on the JOBS Act. So, where are we now? What has been enacted and what issues have been identified with the JOBS Act? I look at each of the provisions of the JOBS Act below:
Title I – Reopening American Capital Markets to Emerging Growth Companies (IPO On-Ramp)
Title I eases the path for companies going public by greatly reducing the regulatory burden for companies with less than $1 billion in revenue. While I believe that regulatory relief is a great first step, Congress should have made much of the relief permanent for small- and mid-cap public companies. But, I suppose we should take what we can get.
One of the most used (maybe universally used) provision of Title I is the ability of an Emerging Growth Company (EGC) to submit its initial registration statement confidentially. This allows a company that begins the IPO process to stop the process without having released its financial and other confidential information to the public or its competitors. Beginning in October, the SEC streamlined the confidential submission process by moving from an email submission process to an Edgar submission process.
One of the biggest complaints with the capital raising process for newly public companies and small- to mid-cap public companies in general is their inability to attract investors and establish a market for their securities. Several provisions in the JOBS Act enhance the EGC’s ability to market its registered offerings. For example, investment banks are now expressly permitted to publish or otherwise distribute research reports on an EGC at any time before, during, or after any offering, including an IPO. Previously, research reports, particularly those by investment banks participating in the offering, had to wait at least 25 days after the offering (40 days if the underwriter served as a manager or co-manager). Unfortunately, because of the risk of lawsuits, investment banks have not fully embraced this change. The industry standard that has developed is to wait 25 days after the offering to publish reports. Despite recent rule changes from FINRA, the investment banks’ regulator, the 25-day waiting period will likely persist for now.
And it was just a matter of time, but the SEC is seeking the first stop order against an EGC. The reduced disclosure allowed by the JOBS Act isn’t to blame, however. The prospectus had a number of red flags, including the issuer’s lack of operations, $0.15 offering price, and the lack of an underwriter. Let’s hope that cases like this do not tarnish future EGC offerings.
Title II – Access to Capital for Job Creators (General Solicitation and Advertising)
In August, the SEC proposed rules to implement the repeal of the ban on general solicitation. As you may recall, while Congress’ directive to the SEC to repeal the ban is clear, the ability to use general solicitation is conditioned on taking “reasonable steps” to determine that the issuer sells securities only to accredited investors. The SEC’s proposed rule takes a facts and circumstances based approach for issuers to determine what those reasonable steps should be rather than setting forth specific “safe harbors” issuers can meet. This subjective approach has proven somewhat controversial in that both the approach and, what the House Republican’s believe to be, its slow implementation, have been subjected to committee hearings. On the other hand, numerous comment letters during the rule making comment period have urged the SEC to require more verification of an investor’s accredited status in the final rules. In fact, several U.S. Senators commented on the proposed rules stating that Congress did not intend to remove all restrictions on general solicitation, but merely to remove the ban on general solicitation.
So, where does this leave us? While the comment period ended on October 5th and the final rules were required to be adopted by the 4th of July, I never expected the final rules to be adopted before Election Day or even in 2012. Chairman Schapiro has been outspoken on her concerns of the JOBS Act, particularly the lack of investor protection. And, although the SEC had undertaken a review of the restrictions on general solicitation before the JOBS Act was enacted, I believe that the reason for the lack of safe harbors in the proposed rule is to reduce the likelihood of issuers using general solicitation. I expect that the SEC will tweak its proposed rules by adding some investor protections such as requiring solicitation materials to be filed with the SEC, but despite calls for “safe harbors” and clarity as to what might constitute “reasonable steps,” the final rules will not include those issuer-friendly provisions.
Title III – Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (Crowdfunding)
We still haven’t seen any movement on the crowdfunding rule implementation. While there is a lot of interest in this exemption, as we have blogged about before, we don’t expect crowdfunding to be a viable exemption.
Title IV – Small Company Capital Formation (Regulation “A+”)
There has been no movement on the implementation of Regulation A+ either, although the SEC Staff has said recently that they are working hard on the rules. Unlike crowdfunding, however, I expect Regulation A+ to have a significant impact on private companies raising capital.
Titles V/VI – Private Company Flexibility and Growth/Capital Expansion (Higher Permissible Number of Shareholders)
While the JOBS Act was largely designed to increase the number of public companies, Titles V and VI reduce the burdens on companies by allowing private companies to stay private by allowing companies to have a greater number of shareholders before having to go public and by allowing banks to go private. We have seen a significant number of banks go private since April.
Despite being inundated with rule making initiatives from the Dodd-Frank Act and the JOBS Act, I expect the SEC to make significant headway in implementing the remaining JOBS Act provisions by the end of 2013.