THE NEW “JOBS” ACT: EASING ACCESS TO CAPITAL FOR SMALLER BUSINESS
On April 5, the President signed the Jumpstart Our Business Startups Act, known as the JOBS Act. The purpose of the Act is to increase job creation and economic growth by improving access to capital. A part of the Act that has garnered much of the attention in national media relaxes certain public company rules for what are called emerging growth companies. The Act also contains a variety of provisions that will make it easier for smaller private companies to raise capital and remain private. There are fewer than a dozen non-bank public companies based in New Hampshire, so for New Hampshire-based companies, these private company provisions deserve attention.
Relaxed Restrictions on Private Offerings. Private companies raising capital beyond “friends and family” financing rely on SEC Rule 506 perhaps more often than on any other securities registration exemption. Rule 506 is an exemption from the requirement that a securities offering be registered with the SEC and state securities regulators, if sales are made only to “sophisticated investors,” no more than 35 of the investors are “non-accredited” (that is, non-wealthy), and the offering entails no “general solicitation or advertising.” General solicitation is a broad term that would include a website reference to the private placement. Very often Rule 506 offerings are limited to accredited investors for the practical reason that SEC rules require very detailed and precise written offering materials if even one non-accredited investor is among the purchasers. A Rule 506 offering to only accredited investors saves time and money and avoids risk inherent in selling to less seasoned investors.
The JOBS Act requires the SEC to amend its rules so that general solicitation and advertising of Rule 506 offerings will be permitted so long as sales are made only to accredited investors. Because many 506 offerings are limited to accredited investors in any event, the introduction of advertising will certainly make it easier for companies to attract attention and increase the potential pool of investors.
Crowdfunding. Crowdfunding is a term used to describe a fundraising approach involving pooling of funds through numerous very small contributions. It was initially developed as a means of raising capital for publication of films, books, recordings, and charities. As originally conceived, the “investor” would receive nothing more than satisfaction, and crowdfunding did not offer the prospect of investor profit.
The JOBS Act crowdfunding exemption will allow a company to raise up to $1 million in any 12-month period, through an unregistered public offering of its securities, using a form of general advertising. In a crowdfunding offering, each investor is limited to investment of the greater of $2000 or 5% of the investor’s annual income or net worth, if the investor’s income or net worth is less than $100,000; and for investors with annual income or net worth at or above $100,000, the cap is the greater of $100,000 or 10% of income or net worth.
Companies who utilize the new crowdfunding offering will work through a broker or new SEC-registered “funding portals,” which are web platforms. Both the crowdfunding company and the funding portals will be subject to regulation. The company will also have to file information with the SEC and provide it to investors.
Staying Private. Although many companies that “go public” do so very intentionally, by registering their IPOs with the SEC, companies may also be forced to become public. Companies must register with the SEC at the point at which they have more than $10 million in assets and 500 shareholders of record. This can become an issue for larger private companies, particularly those that provide equity incentives or stock purchase plans to employees or have had many stock transfers over time. The JOBS Act raises the shareholder limit to 2000 (but only 500 non-accredited investors) and, in addition, excludes from those thresholds employee compensation plan shareholders and crowdfunding purchasers.
Expanded Small Public Offerings Under Reg A. SEC Regulation A provides for capital raises of less than $5 million using an offering circular that can be publicly distributed. The offering document must conform to the Reg A disclosure requirements. Because the $5 million limit is statutory, Reg A has been used less and less often over the years, as the cost of producing and filing conforming offering documents has increased in proportion to the $5 million limit and as Rule 506 offerings became more practical and cost-effective.
The JOBS Act has increased that threshold to $50 million. The offering must still be filed with the SEC and is subject to SEC staff review and comment, though at regional offices rather than Washington D.C., and a Reg A offering will result in required annual audited financial statement filings with the SEC.
The IPO On-Ramp for Emerging Growth Companies. The JOBS Act significantly relaxes the initial public offering process for “emerging growth companies”—non-public companies with annual revenue under $1 billion. The JOBS Act allows the company to file a confidential registration statement with the SEC, for non-public review. Further, emerging growth companies retain that status for five years from its IPO, though it may lose that status sooner if it exceeds $5 billion in annual revenues or issues more than $5 billion in non-convertible debt. Until that time, the company will be subject to relaxation of some burdensome and expensive public company disclosure rules.
Dick Samuels is the former chair of the Corporate Department at the law firm of McLane, Graf, Raulerson & Middleton, Professional Association. He concentrates his practice in corporate governance, corporate transactions and securities regulation. He can be reached at (603)628-1470 or by email at [email protected]. The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth as well as Woburn, Massachusetts.