1. PRESIDENT SIGNS THE JOBS ACT INTO LAW TO SIMPLIFY
CAPITAL FORMATION
A. Introduction
President Obama signed into law last week the Jumpstart Our Business Startups Act (the “JOBS
Act”). This new legislation is intended to spur job creation and economic growth by making it
easier for smaller companies to raise public and private capital in the U.S. financial markets.
Among the most significant provisions in the JOBS Act is the creation of a new category of
issuers called “emerging growth companies” (“EGCs”) that would be exempt from certain
regulatory requirements for a limited period of time in an effort to encourage them to go public
in the U.S. The JOBS Act also includes other measures intended to ease private capital
formation.
In general, the JOBS Act:
• provides relief to EGCs from various requirements and other restrictions
applicable to initial public offerings (“IPOs”) and (on a transitional basis, for up
to five years) from certain public company periodic reporting obligations;
• removes the prohibition on general solicitation in connection with private
offerings effected pursuant to Rule 506 or Rule 144A under the Securities Act of
1933, as amended (the “Securities Act”), provided that sales are limited to
qualifying investors;
• alters the thresholds that trigger registration of an issuer’s securities under Section
12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
including a different threshold for banks and bank holding companies;
• authorizes the Security and Exchange Commission (“SEC”) to increase the
amount permitted to be raised in a Regulation A offering from $5 million to $50
million in any 12-month period; and
• adds a “crowdfunding” exemption to the Securities Act.
Many of the JOBS Act’s provisions became effective upon signing by the President on April 5,
2012.
A summary of the JOBS Act’s more significant provisions are described below.
B. Facilitation of Capital Formation by “Emerging Growth Companies”
The JOBS Act creates a new category of issuer, the EGC, that provides for modified disclosure
obligations and flexibility in other requirements in connection with such issuer’s IPO, as well as

2. providing for certain disclosure obligations and other requirements to be phased in over a five-
year period following the issuer’s IPO.
An EGC is defined as an issuer with total annual gross revenues of less than $1 billion (subject to
inflation adjustments by the SEC every five years) during its most recently completed fiscal year.
All companies that qualify as EGCs will have the option to pursue an IPO process that is
intended to be more streamlined than what current rules require. An EGC retains its status until
the earliest of:
• the last day of the fiscal year during which it had total annual gross
revenues of $1 billion or more;
• the last day of the fiscal year following the fifth anniversary of the issuer’s
IPO;
• the date on which the issuer has, during the previous three-year period,
issued more than $1 billion in non-convertible debt; or
• the date on which the issuer is deemed to be a “large accelerated filer,” as
defined in Rule 12b-2 under the Exchange Act.
In connection with the registration of securities in an IPO and with respect to its ongoing
disclosure obligations during the five-year phase in period after becoming a public company, an
EGC will enjoy the following exemptions from, and modifications of, disclosure requirements
and accounting and auditing standards, many of which became effective upon passage of the
JOBS Act:
• Reduced Audited Financial Statement Requirements, Selected Financial Data and
MD&A Disclosures.
- Audited financial statements will be required for only two fiscal years in
an EGC’s registration statement for its IPO.
- Selected Financial Data will be required for only the fiscal years that were
audited in an EGC’s registration statement for its IPO.
- Management’s Discussion and Analysis of Financial Condition and
Results of Operations will be required for only the audited years in an
EGC’s registration statement for its IPO.
• Testing the Waters--The JOBS Act permits an EGC or its agent to communicate
with potential investors, either orally or in writing, that are “qualified institutional
buyers” (“QIBs”), as defined under Rule 144A of the Securities Act, or
institutions that are accredited investors, as defined under Rule 501 of the
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3. Securities Act, to determine whether such persons might have an interest in an
IPO or other contemplated securities offering, either prior to or after the date of
filing of a registration statement with the SEC with respect to such offering.
• Confidential Filing of Registration Statements--An EGC will be able to submit to
the SEC a draft registration statement for an IPO on a confidential basis and for a
confidential nonpublic review by the staff of the SEC, provided that the initial
confidential submission and all amendments thereto are publicly filed with the
SEC not later than 21 days before the date on which the issuer conducts a road
show.
• Say on Pay/Golden Parachute Disclosures-- An EGC will not be required to
comply with the say-on-pay and say-on-golden parachute requirements adopted
by the SEC pursuant to the requirements of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (“Dodd-Frank”).
• Internal Control Auditor Attestation--The requirement to file a report of its
independent registered public accounting firm on its internal control over
financial reporting will not be required for an EGC; however, an EGC will be
required to have internal control over financial reporting and its management will
have to report on the adequacy of the company’s internal control over financial
reporting after the company has filed with the SEC its first annual report on Form
10-K.
• Reduced Executive Compensation Disclosures--Executive compensation
information will be presented in the limited format required for “smaller reporting
companies.” (A “smaller reporting company” is a company with a public float of
less than $75 million as of the last day of its most recently completed second
fiscal quarter.) In addition, an ECG will not be subject to the rules that the SEC
adopts to implement the Dodd-Frank pay-for-performance and pay equity
disclosure requirements.
• Exemption from Future PCAOB Rules--With respect to the audit of an EGC, the
JOBS Act exempts such company’s independent registered public accounting firm
from complying with any rules adopted by the Public Company Accounting
Oversight Board (“PCAOB”) after the date of the JOBS Act’s enactment, except
as otherwise required by SEC rule. The JOBS Act exempts EGCs from any
requirement adopted by the PCAOB for mandatory rotation of the accounting firm
or for a supplemental auditor report about the audit and the company’s financial
statements.
• Impact of Choice to Comply with Rules for EGCs--An EGC has the option of
choosing to comply with requirements that apply to public companies that are not
EGCs. If an EGC chooses to comply with any new or revised financial
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4. accounting standard, however, it must advise the SEC of that choice and must
comply with all of the financial accounting standards that are applicable to
public non–EGCs and may not simply “cherry-pick” those that it wishes to
comply with.
C. Expansion of Regulation A Registration Statement Exemption for Public Offerings
of Up to $50 Million
The JOBS Act amends the small issuer exemption in Section 3(b) of the Securities Act to permit
the SEC to amend Regulation A to, among other things, increase the aggregate offering amount
of securities offered and sold within any 12-month period in reliance on such exemption from $5
million to $50 million. In general, the Regulation A exemption provides for the following:
• This exemption has been referred to as a “short form” registration because it
required the filing of an offering statement with the SEC, which is subject to
review by the SEC Staff and must be delivered to prospective investors.
• The Regulation A exemption is generally available for any United States or
Canadian entity that (i) has its principal place of business in the United States or
Canada and (ii) is not a public company subject to reporting obligations with the
SEC.
• Until now, Regulation A offerings did not preempt the state securities registration
laws, with the result that all applicable state securities law requirements had to be
complied with in addition to meeting the federal requirements.
Due principally to the offering size limit and state law issues, Regulation A has rarely been used
historically.
Securities covered by the new exemption include equity securities, debt securities, and debt
securities that are convertible or exchangeable to equity interests, including any guarantees of
such securities. Securities sold pursuant to the new exemption will preempt state securities
registration laws, only if (i) the securities are offered or sold on a national securities exchange or
(ii) the securities are offered or sold to “qualified purchasers” (as defined by the SEC). States
will retain jurisdiction with respect to fraud and deceit or unlawful conduct by a broker or dealer
in connection with an offering under this new exemption.
The new exemption will also permit issuers to solicit interest in the offering prior to filing any
offering statement pursuant to specified terms and conditions.
The new exemption will be subject to the requirement that the issuer:
• file audited financial statements annually with the SEC; and
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5. • comply with any other terms or conditions established by the SEC, which may include
requirements that the issuer file with the SEC and distribute or make available to
investors an offering statement and post-offering periodic disclosures regarding its
business operations, financial condition, corporate governance principles, and other
matters.
In addition, the JOBS Act provides that the civil liability provision in Section 12(a)(2) of the
Securities Act will apply to any person offering or selling securities pursuant to the new
exemption.
D. Higher Shareholder Threshold for Exchange Act Registration
The JOBS Act increases the number of shareholders that can invest in a private company from
500 to 2,000, before triggering the registration requirements under the Exchange Act. Section
12(g) of the Exchange Act and the rules promulgated thereunder currently require an issuer to
register a class of equity securities with the SEC if, on the last day of the issuer’s fiscal year,
such class of equity securities is held of record by 500 or more persons and the issuer has total
assets of more than $10 million. Upon a company registering a class of equity securities under
Section 12(g) of the Exchange Act, all of the reporting and other requirements under the
Exchange Act apply with respect to that company.
The JOBS Act amends the registration threshold, with specific requirements for issuers that are
banks or bank holding companies and separate requirements for all other issuers.
• An issuer that is a bank or bank holding company will now become subject to
Exchange Act requirements if, on the last day of its fiscal year, the issuer has total
assets exceeding $10 million and a class of equity securities held of record by
2,000 or more persons.
• In the case of a bank or a bank holding company, the issuer will no longer be
subject to Exchange Act requirements if the number of record holders falls below
1,200 persons.
• For all other types of issuers, an issuer will now become subject to Exchange Act
requirements if, on the last day of its fiscal year, the issuer has total assets in
excess of $10 million and a class of equity securities held of record by either (i)
2,000 persons, or (ii) 500 persons who are not accredited investors.
• An issuer that is not a bank or a bank holding company will no longer be subject
to Exchange Act requirements if the number of record holders falls below 300
persons (which did not change from the specified threshold prior to the JOBS
Act).
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6. The JOBS Act specifically amended the definition of “held of record” so as to not include
securities held by persons who received their securities pursuant to an employee compensation
plan in transactions exempt from federal registration requirements. The SEC is required to
amend its rules to implement that change in the definition of “held of record.” Additionally, the
JOBS Act directs the SEC to issue rules exempting securities acquired pursuant to the new
crowdfunding exemption (discussed below) from the minimum shareholder threshold for
Exchange Act registration.
E. Relaxed Manner of Offering Restrictions on Private Placements
The JOBS Act eliminates the prohibition on widespread advertising and other forms of general
solicitation in private securities offerings under Rule 506 of Regulation D or Rule 144A under
the Securities Act, provided that ALL purchasers of the securities are accredited investors (as
defined in Rule 501 of Regulation D) or qualified institutional buyers (“QIBs”) (as defined in
Rule 144A).
• Previously, advertising or general solicitation of prospective investors, such as by
publishing information about a private placement on the internet or through any
publication or broadcast, was not permitted.
• The JOBS Act now requires issuers of securities to take reasonable steps to verify
that purchasers are accredited investors or QIBs, using methods to be determined
by the SEC.
- Previously, it was sufficient for issuers to rely on investors self-certifying
that they qualified as accredited investors or QIBs. The SEC is required to
amend it rules to implement these changes.
In addition, the JOBS Act clarifies that Internet-based and other platforms that match prospective
investors with businesses raising capital will not be required to register as a securities broker due
to their matching services in connection with securities offered and sold in reliance on Rule 506.
• This exemption is ONLY available if the matching service and its personnel do
not receive compensation in connection with the purchase or sale of securities, do
not hold customer funds and are not subject to “bad actor” disqualifications.
F. Crowdfunding
The JOBS Act exempts from the Securities Act registration requirements certain “crowdfunding”
transactions. “Crowdfunding” is a new outgrowth of social media that describes a capital-raising
strategy whereby groups of people pool money, composed of small individual contributions, to
support accomplishment of a particular goal. Today, there is increasing interest in crowdfunding
as a means of offering investors an ownership interest in an early-stage or small company.
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7. Specifically, the new “crowdfunding” exemption promulgated by the JOBS Act:
• creates a new exemption that would permit non-reporting issuers to raise up to $1
million in reliance on the exemption within any 12-month period, with a
maximum investment per investor of:
- the greater of $2,000 or 5 percent of the investor’s annual income or net
worth within any 12-month period (if either the investor's annual income
or net worth is less than $100,000); and
- 10 percent of the investor's annual income or net worth, not to exceed a
maximum amount of $100,000 (if either the investor's annual income or
net worth is equal to or more than $100,000);
• requires that a transaction be conducted through a broker or “funding portal”
(defined as any person acting as an intermediary in a transaction involving the
offer or sale of securities for the account of others pursuant to this exemption that
meets certain conditions (including not offering investment advice or
recommendations, not soliciting purchases, sales or offers to buy securities
offered or displayed on its website or portal and not compensating employees and
others for such solicitation or based on the sale of securities));
• does not permit an issuer to advertise the terms of the offering, except for notices
that direct investors to the broker or funding portal;
• requires an issuer to file with SEC and provide to investors and the intermediary
specified information:
- about the issuer, including a description of the issuer's business,
anticipated business plan and financial condition, which would include
audited financial statements (if the offering, together with all other
offerings of the issuer pursuant to this exemption within the preceding 12-
month period have, in the aggregate, target offering amounts of more than
$500,000, or such other amount as the SEC may establish by rule);
- about the transaction, including the target offering amount, the deadline to
reach the target amount, the price, the use of proceeds and risks to
purchasers;
• provides for a civil liability provision for material misstatements in, or material
omissions from, an offering document or oral communications involved in the
offer or sale of securities;
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8. requires an issuer to file with the SEC, not less than annually, and provide to investors
reports of the issuer's results of operations and financial statements (as determined
appropriate by the SEC);
• treats securities offered as “covered securities,” thereby pre-empting registration
under state blue sky laws;
• requires the SEC, by rule, to exempt, conditionally or unconditionally, securities
acquired pursuant to this exemption from the provisions of Exchange Act Section
12(g);
• requires a person acting as a broker or funding portal intermediary to take certain
actions, including to:
- register with the SEC as a broker or funding portal and register with any
applicable self regulatory organization;
- provide such disclosures, including those related to risks and other
investor education materials, as the SEC by rule will determine
appropriate, and ensure that investors review such disclosures, affirm risk
of loss and answer various questions;
- take such measures to reduce risk of fraud, as will be established by the
SEC, including background and regulatory checks on directors, officers
and significant shareholders of issuers;
- make available to the SEC and to potential investors any information
provided by the issuer to investors and intermediaries, not later than 21
days prior to the first day on which securities are sold to any investor; and
- make such efforts as the SEC determines appropriate by rule to ensure that
no investor in a 12-month period has purchased securities offered pursuant
to this exemption that, in the aggregate, from all issuers, exceed the
investment limits set forth above;
• requires the SEC, by rule, to exempt, conditionally or unconditionally, a funding
portal that is a member of a national securities association registered under
Exchange Act Section 15A from the requirement to register as a broker or dealer
under Exchange Act Section 15(a)(1);
• restricts transfer of securities issued and sold under such exemption for one year
(unless the securities are resold to the issuer, an accredited investor, as part of a
registered offering or to a family member of the purchaser under limited
circumstances); and
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9. • requires the dollar amounts in such exemption, as well as those that govern the
type of financial information to be provided to investors and intermediaries, to be
adjusted by the SEC not less frequently than once every five years.
G. Effective Dates
Most of the provisions of the JOBS Act are effective immediately upon enactment, including the
exemption for EGCs and the availability of general solicitation and general advertising in Rule 506
offerings. Other provisions require implementation by rulemaking, such as the new exemption for
crowdfunding offerings and offerings that do not exceed $50 million. Senior SEC staff members have
indicated that the staff will likely provide guidance on effective date issues shortly after enactment.
This Alert does not constitute legal advice and counsel should be consulted regarding specific factual situations
which will determine the compliance advice applicable to any particular question regarding the subject matter. If
you would like additional information or advice and counsel on training, compliance or audits, please let us know.
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