JOBS Act Series By: Brenda Lee Hamilton, Attorney
Hamilton & Associates Securities Lawyers
October 16, 2012
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), into law. Title I of the JOBS Act, which became operative as soon as the JOBS Act was signed into law, amends the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act) and creates the “emerging growth company” as a new category of issuer under federal securities laws. The Act made significant changes which will affect issuers who go public direct, the IPO process including direct public offerings, IPO registration statement disclosure requirements and post-IPO reporting, and other requirements for emerging growth companies. These changes became effective upon enactment of the JOBS Act without further rule-making by the SEC or other organizations.
Portions of these proposals will affect the legal and compliance matters applicable to virtually all issuers including SEC reporting and non-reporting issuers, issuers who go public direct and conduct direct public offerings, issuers who engage in reverse mergers with public shells and private companies who undertake securities offerings.
An emerging growth company is defined as an issuer with aggregate annual gross revenues of less than $1 billion during its most recent fiscal year. These amendments are intended to lessen the requirements for emerging growth companies to raise capital from the public by reducing the disclosure requirements for issuers conducting an initial public offering. The new regulatory requirements for emerging growth companies will be phased in over a period of up to five years after an initial public offering (“IPO”).
An issuer that is an emerging growth company on the first day of its most recent fiscal year continues to be an emerging growth company until the earlier of:
● the last day of the fiscal year in which the issuer’s gross revenues exceeded $1 billion;
● the fifth anniversary of the effective date of the issuer’s registration statement under the Securities Act;
● the date that the issuer has, during the previous three-year period, issued nonconvertible debt securities exceeding $1 billion in the aggregate; or
● the date that the issuer qualifies as a large accelerated filer.
The JOBS Act lessens requirements of the securities laws for emerging growth companies as follows:
● Emerging growth companies may provide only two years of audited financial statements rather than three in their IPO registration statement;
● Emerging growth companies may submit a “draft” Form S-1 to the SEC for confidential review instead of filing it publicly on the SEC’s Edgar database. A Form S-1 that is confidentially submitted must be substantially complete, including all required financial statements and signed audit reports. A confidential submission does not have to be filed publicly until 21 days before the issuer commences a road show;
● The restrictions on communications of an IPO are reduced to permit any individual authorized to act on behalf of an emerging growth company to engage in oral or written communications with qualified institutional buyers or institutional accredited investors to “test the waters”; and
● The JOBS Act removes the ban on the distribution of research reports by brokers or dealers in connection with the emerging growth company’s IPO. The Act also removes restrictions on who may arrange for communications between securities analysts and investors, and permits securities analysts to participate in communications with an emerging growth company’s management along with broker or dealer representatives.
For as long as an issuer is an emerging growth company, it is:
● exempt from the requirement to obtain an auditor attestation report on its internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002;
● not required to comply with any new or revised financial accounting requirements until the date that a private company is required to comply with the new or revised accounting standard;
● not required to comply with mandatory audit firm rotation or a supplement to the auditor’s report;
● not required to comply with any additional PCAOB rules adopted after the JOBS Act’s enactment date unless the SEC determines and adopts rules requiring such compliance;
● exempt from the Say-on-Pay, Say-on-Frequency and Say-on-Parachute Requirements mandated by the Dodd-Frank Act that companies seek stockholder approval of an advisory vote on their executive compensation arrangements, including golden parachute compensation until 1 to 3 years after the issuer ceases to be an emerging growth company;
● exempt from the requirement to provide golden parachute disclosures and to hold a say-on-golden parachute vote;
● exempt from requirements of the Dodd-Frank Act (not yet effective), which requires disclosures about the relationship between executive compensation and financial performance and the ratio between CEO compensation and median employee compensation; and
● permitted to provide reduced executive compensation disclosure in accordance with the SEC’s rules applicable to smaller reporting companies.
In addition to the changes described above, the JOBS Act requires the SEC to conduct a review of Regulation S-K which contains the disclosure rules applicable to both offerings under the Securities Act such as direct public offerings and periodic reporting under the Exchange Act within 180 days following the enactment of the JOBS Act with rule-making proposals to simplify the registration process and reduce the costs and other burdens on emerging growth companies.
By reducing the time, cost and complexity of going public, the JOBS Act will encourage eligible companies to pursue IPOs. Additional SEC rulemaking and guidance relating to the matters described above, may result in further changes to the rules and regulations affecting issuers who go public direct and the IPO process including those who undertake direct public offerings. Until this occurs, the practical impact of these changes is unclear.
For further information about this article, please visit www.securitieslawyer101.com or www.gopublic101.com or contact Hamilton & Associates at (561) 416-8956 or by email at email@example.com. This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.