The New JOBS Act: Key Features

On April 5, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Obama. The JOBS Act reduces the regulatory burden on smaller companies, making it easier for them to seek and attract funding and to enter capital markets. The legislation attracted strong bipartisan support in Congress. Here, we’ll take a look at what the Act contains, and what it means for the business community.

To encourage newer and smaller businesses to go public, the JOBS Act created a new category of issuers called emerging growth companies, or EGCs, that benefit from significantly reduced reporting, disclosure, and other regulatory requirements. Generally, any new issuer that has total annual gross revenues of less than $1 billion during its most recently completed fiscal year is considered an EGC.

The JOBS Act allows EGCs to avoid outside audits of their internal controls over financial reporting, for up to five years. Such audits had been required of all but the smallest issuers under the Sarbanes-Oxley Act. And instead of having to present three years of audited financial statements when filing their IPO registration statements, EGCs need to present only two years’ worth. The Act also permits EGCs to “confidentially submit” draft IPO registration statements to the SEC for the agency’s confidential review prior to the statement’s public filing.

EGC status is available for only a limited time. An issuer loses that status, and the exemptions and benefits associated with it, on the earliest of:

• The last day of the fiscal year following the fifth anniversary of the issuer’s IPO.
• The last day of the fiscal year during which it had total annual gross revenues of at least $1 billion.
• The date as of which the issuer has issued more than $1 billion in non-convertible debt during the previous three-year period.
• The date on which the issuer is considered by the SEC to be a “large accelerated filer” because, among other things, the value of its public float reaches or exceeds $700 million.

The JOBS Act eases regulatory burdens in a number of additional areas. Before the Act, an issuer generally had to register with the SEC when the number of its shareholders of record reached 500. The legislation raises that threshold to 2,000 shareholders, as long as fewer than 500 of them are not accredited investors. The Act excludes from this calculation people who received their shares under an employee compensation plan.

The rules for banks and bank holding companies have also changed. Their shareholder threshold for SEC registration rises under the Act from 500 to 2,000 shareholders. The Act hikes the de-registration threshold as well, from 300 to 1,200 shareholders.

Going public is made easier by yet another of the Act’s provisions. Previously, companies could sell up to $5 million in shares under Regulation A without having to register with the SEC. That threshold has been raised tenfold, to $50 million. In addition, the Act removes restrictions on the use of advertising to solicit investors.

The JOBS Act also enhances the ability of small businesses to raise capital by removing SEC restrictions on an activity called crowd-funding. Crowd-funding involves raising funds, typically via the Internet, from large pools of small investors who need not be accredited by the SEC. Crowdfunded businesses may raise up to $1,000,000 without registering with the SEC.

Some of the JOBS Act’s provisions became effective immediately, while other provisions require rulemaking by the SEC under deadlines that vary from 90 to 270 days after enactment of the law.

The JOBS Act offers increased opportunity for funding while decreasing regulatory requirements for small business, which can increase innovation and facilitate growth. However, the prudent business person should continue to evaluate the regulatory requirements and perform appropriate diligence before making investments or raising capital.