JOBS Act: Eases Capital Formation IPO Candidates and Private Companies

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1 JOBS Act: Eases Capital Formation IPO Candidates and Private Companies Jonathan Guest McCarter & English, LLP Richard Lucash McCarter & English, LLP

2 Securities Laws Federal Laws impacted by JOBS Act Securities Act of 1933 Emerging Growth Company new defined term Rule 506/Rule 144A Regulation A Securities Exchange Act of 1934 State Blue Sky laws still relevant disclosure review or merit qualification Federal preemption in limited circumstances 2

3 JOBS Act Jumpstart Our Business Startups Act Enacted April 5, 2012 Requires SEC rulemaking for full implementation SEC has issued some FAQs and proposed rules Bipartisan attempt to stimulate economic growth by lowering barriers to raising capital I. Reduces requirements for small company IPOs II. Removes restrictions on general solicitation and advertising in Rule 506/rule 144A offerings III. Allows equity crowdfunding for U.S. companies, subject to limitations IV. Increases max. size of mini-ipos to $50 Million V. Eases mandatory SEC reporting triggers 3

4 Crowdfunding Funding a project or venture by raising small amounts of money from a large number of people Not possible (for equity) pre-jobs Act New exemption from registration Companies may raise up to $1M in 12 mo. Federal preemption of state Blue Sky laws No wealth thresholds for investor participation, wealth does impact amount that can be invested Limited disclosure requirements Partly determined by amount of financing 4

5 Crowdfunding Companies required to use approved portals Portals must be registered with SEC and FINRA Obligations of portals TBD 5

6 Rule 506 Change Under JOBS Act General solicitation/advertising permitted when SEC adopts new rules Rule 506 purchasers limited to accredited investors natural persons; income and net worth tests Institutional accredited investors 6

7 Rule 506 and Rule 144A SEC proposed rules require issuer to take reasonable steps to verify purchasers are accredited avoids rigid tests, verification methods may vary Unpaid third-party finders permitted for Rule 506 offerings Old rules for 506 offerings without general advertising/solicitation remain 7

8 Mini-IPOs Under Regulation A Currently (rarely used) Permits sales of securities to the public No investor qualification requirements May test the waters before filing offering documents Shares freely tradable Offering statement reviewed by SEC Streamlined disclosure requirements (vis-a-vis IPO) Limited to $5 million in 12 month period 8

9 Mini-IPOs Under Regulation A + JOBS Act Increases $$ threshold to $50 million in 12 mo. Blue Sky laws pre-empted if sales only to qualified purchasers (to be defined by SEC) or shares are listed Must file disclosure information with SEC and make periodic reports, incl. audited financials Imposes prospectus liability under Section 12(a)(2) No specific deadline for new rules 9

10 Emerging Growth Company Emerging Growth Company a new category of issuer Qualify as EGC if total gross revenues in most recent fiscal year < $1B and no registered public offering before 12/8/12 10

11 Emerging Growth Company Remain EGC until earliest of: Annual gross revenues exceed $1B Last day of fiscal year that is 5 th anniversary of common equity IPO Issued more than $1B non-convertible debt during previous 3 year period Becomes large accelerated filer - public float above $700M 11

12 Emerging Growth Company IPO process IPO process benefits for ECGs: Confidential submission of registration statements Pre-IPO research reports by broker/dealer not deemed an offer or sale Can communicate with QIBs and accredited institutional investors to test the waters Only 2 years of audited financial statements (and related MD&A); can omit certain selected financial data 12

13 Emerging Growth Company May elect reduced executive compensation disclosure available to smaller reporting companies (no CD&A, 3 rather than 5 NEOs, 2 years summary compensation) 13

14 Emerging Growth Company post-ipo Reduced SEC reporting post-ipo exempt from: Auditor attestation report (SOX 404) Shareholder advisory votes on executive comp ( say-on-pay ) Executive compensation comparisons Mandatory audit firm rotation Pay v. performance information and CEO v. median employee compensation comparison 14

15 34 Act reporting threshold increase Current law: 500 shareholders of record (and more than 300 U.S. residents) plus $10 million total assets triggers obligation of foreign company to file reports with the SEC JOBS Act: holders of record increased to 2,000 and fewer than 500 not accredited (compensation plan awardees exempt) Listed foreign private issuers can still elect Rule 12g3-2(b) exemption 15

16 Takeaways 1. JOBS Act should make capital formation easier 2. But a lot depends on SEC rules 3. Crowdfunding by small investors not yet permitted SEC rules are coming 4. Rule 506 with general solicitation will require special attention to accredited investor verification techniques 5. Emerging growth company attractive for issuers: easier IPO and slower route to full SEC compliance 6. Reg A+ could be attractive middle route for raising capital and creating liquidity 16

17 Panelists Questions? Jonathan Guest McCarter & English, LLP Richard Lucash McCarter & English, LLP