Friday, April 13, 2012

JOBS Act is Now the Law – What Does it Mean for Start-ups?

On April 8, 2012, President Obama signed the Jumpstart Our Business Startups Act into law. The Act introduces major changes to the securities law of this country, comparable to those introduced by the Sarbanes-Oxley Act of 2002. Click here for the full text of the law:

In particular, the JOBS Act makes the following changes:

1. IPO Process. The JOBS Act significantly relaxes the IPO process for the Emerging Growth Companies (EGCs, defined as companies with less than $1 billion in annual gross revenues) as well as reduces many restrictions for the EGCs that typically apply to securities offerings by public companies.

2. Periodic Reporting. The JOBS Act also relaxes the periodic reporting requirements for the EGCs. These changes are effective immediately.

3. Ban on General Solicitation and Advertising. The Act lifts the ban on general solicitation and advertising in offerings conducted under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933, as long as all investors are either accredited investors (for Rule 506 offerings) or qualified institutional buyers (for Rule 144A offerings). The Securities and Exchange Commission (the SEC) has 90 days to modify these rules to include the changes made by the JOBS Act as well as to determine the verification methods that companies need to use to make sure that their investors are accredited or qualified institutional buyers. So, stay tuned.

4. The 500 Shareholder Rule. Effective immediately, the Act increases the shareholder threshold to 2,000 persons in total or 500 persons who do not qualify as accredited investors (not counting those shareholders who purchased securities in a crowdfunding transaction and employees). This allows companies to delay going public (the previous threshold was 500 persons).

5. Regulation A Offerings. The Act increases the cap on the exempt securities offerings conducted under Regulation A from $5 million to $50 million.

6. The New Crowdfunding Exemption. Finally, the long awaited crowdfunding exemption. This is the most ambiguous of all provisions of the Act, since much will depend on the SEC rules that the Commission has 270 days to issue. According to the law, the companies using this exemption will need to provide certain disclosures and file them with the SEC 21 days in advance of the sales; the securities issued will be restricted securities for one year; and the crowdfunding portals will be regulated as well. Importantly, the securities issued in a crowdfunding transaction will be exempt from state blue-sky registration requirements.

The JOBS Act is a significant development in the securities laws. While the first five major areas of the law outlined above are clear and understandable, the actual implementation of the sixth change, the crowdfunding exemption, is less clear, and will depend in large part on the much anticipated SEC regulation.

So, for start-ups, there are no immediate benefits. Once the SEC revises Rule 506 and other related Regulation D rules within the next 90 days, it will become easier for the start-ups to raise capital from accredited investors, as they now will be able to use general solicitation and advertising to do so. As far as the crowdfunding exemption is concerned, - 270 days is a long long time.

For a great synopsis of the JOBS Act, check this blog:

All opinions expressed here are my own, and should not be construed as legal advice.

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