This post is a continuance of a series reviewing the JOBS Act. For more on the registration requirement threshold shift from 500 to 2000 investors, click here. For Jim’s initial analysis of Crowdfunding, click here. Check back later for a flushed-out analysis of Title I of the Jobs Act, which creates the “Emerging Growth Company” classification.
Today’s the day! President Obama signed the JOBS Act in a Rose Garden signing ceremony today. Most of the Act requires the SEC to weigh in, so there won’t be much immediate impact. That said, effective today, “Emerging Growth Companies” – most companies with under $1 billion in annual revenues that have been public for less than 5 years – will be excluded from some of the SOX auditing requirements and Dodd-Frank corporate governance requirements that their older and bigger brethren are burdened by. By one professor’s calculations, 94% of companies (excluding banks, savings and loans, and IPOs involving units) that went public between 1980 and 2011 had under $1 billion dollars in annual revenue. I don’t know the exact legal threshold for “seismic regulatory landscape shift”, but I think something impacting 9 out of 10 IPOs probably does it.
That said, I promised to write about Titles II and IV of the JOBS Act today, and I’m a man who stands by his word.
Title IV of the Act, Small Company Capital Formation, amends the curiosity that is Regulation A. Unless you are Professor of securities law (my condolences if you are), you probably never heard of Reg A. That’s because it was such a small exemption from the registration requirements under the Securities Act of ’33 that no one used it. It was so unimportant that it doesn’t even have a Wikipedia page, making it less important than an individual episode of the Simpsons. Regulation A is a safe harbor that lets small issuers avoid most registration requirements. Before, the company was limited to raising $5 million in a year, so most companies relied on the limitless Rule 506 under Regulation D instead, even though Reg D came with a handful more restrictions on who you could sell securities to. (Note that Reg D has its own wiki page. Also note that its smaller than the Simpsons episode wiki. I’ve already asserted that a topic’s importance can be gauged by it’s Wikipedia page so… QED: the Simpsons are more important than securities law?) But now the limit is $50 million, which makes Reg A relevant for the first time. But you start can’t handing out fliers about your $50 million dollar issuance under Reg A just yet, because the Act amends Section 3(b)(2) of the Securities Act of ’33, which states, “The [Securities and Exchange] Commission shall by rule or regulation….” That means that you need to wait until the SEC gets around to revamping Regulation A. Sure, it seems as easy as just adding an extra zero to the current Reg A, but Congress didn’t give the SEC a deadline (not that they really matter: almost 70% of the Dodd-Frank deadlines were not met), so this could take a while.
A quick aside on the SEC’s take on the JOBS Act: they kind of seem to hate it. Commission Aguilar and Chairwoman Shapiro both lambasted the Act when Congress was debating it. Now that its law, they have been tasked with passing the necessary rules and regulations to enact the law. First off, the SEC has been swamped with enacting Dodd-Frank, so the odds of them getting to the JOBS Act sometime soon are somewhat worse than the odds of the Pirates winning the pennant this year. We are a long way off on seeing Secondly, once they do make some rules, you can expect the SEC to only relent as much as the statute forces them.
Title II of the Act will eliminate the prohibition on general solicitation on Rule 506 offerings under the Securities Act. Before, companies using the Reg D exemption to do a private offering couldn’t use public advertising to sell their securities, or else they might be deemed a public offering. Now they can, provided that they only sell shares to “accredited investors”. The Act also amends Rule 144A under the Securities Act in a similar way, just replace “sell” with “resell” and “accredited investors” with “qualified institutional buyers.” This provision is more of a stimulus package for the Wall Street Journal than anything else, coming out of the hides of some Wall Street law firms, who used to have plenty of work making sure that their clients weren’t engaged in “general solicitation.” Now, an issuer relying on Rule 506 of Reg D can go shout it on the mountaintop that they are looking for one-percenters to buy their securities. Congress gave the SEC a 90 day deadline to enact this change. Title II should make it easier for companies using Rule 506 to stay in compliance, and “easier… to stay in compliance” means “cheaper, because of less lawyers fees.”
Like I said yesterday, the JOBS Act isn’t about jobs. And it isn’t about increasing the number of IPOs. These two provisions, which make it easier for companies to raise money privately, makes that obvious. Along with the changes to 12(g) of the Exchange Act, it’ll be easier for small companies to stay private longer. Notably, a bigger Reg A and easier-to-use Rule 506 means that angel investors will have an easier time cashing out of start ups.
I joked a few weeks back about how no one could oppose something called the JOBS Act, but apparently I really was onto something. The JOBS Act will reduce the fund-raising costs for many small- and mid-cap businesses. That’s not a bad thing, but its disheartening that it had to come under the guise of an IPO and employment booster.