the United States. For example, the gross spread in the US for an offering size between $25 million and $100 million is approximately 7%, while in Europe it would be approximately 4% for a similar offering.


The impact of the communications rules In his letter, Issa indicated that the communication rules governing the offerings of securities potentially conflict with the promotion of disclosure and transparency and the First Amendment. He requested an explanation for the potential harm to a non-accredited investor that may realistically result from the receipt of an advertisement by an issuer of unregistered securities that is targeted at accredited investors or QIB. In her response, Schapiro described the communications rules that apply to registered and unregistered offerings. Under the Securities Act, for registered offerings, an issuer’s ability to communicate varies depending on the three phases of the registration process called the pre-filing period, quiet period, and the post-effective period.16


During the pre-


filing period before filing a registration statement, an issuer may not offer securities.17


During the quiet period (or


waiting period), an issuer can make oral offers but cannot make written offers other than through a prospectus that complies with section 10 of the Securities Act.18


In the


post-effective period, an issuer can sell and deliver securities as long as a final prospectus that complies with section 10(a) of the Securities Act accompanies or precedes the delivery of the securities. Schapiro discussed the offering reforms adopted in 2005


that liberalised an issuer’s ability to communicate during offerings.19


She also clarified that had these rules been


effective when Google and Salesforce.com conducted their IPOs, the SEC would not have imposed a cooling-off period to address gun-jumping concerns. Schapiro’s letter points out that with respect to offerings not registered under the Securities Act, issuers relying on section 4(a)(2) of the Securities Act or its safe harbour, Rule 506 of Regulation D, generally are not allowed to use a general solicitation or advertising to attract investors to their offering. In addition, the SEC adopted Rule 155, another safe harbour, that allows companies to abandon a public offering and instead raise money through a private offering. Schapiro recognised that some view the general solicitation ban as a significant burden on capital raising and may be unnecessary as offerees who might be located through general solicitation and who might not purchase the securities would not be harmed.20


Others, however,


support the solicitation ban on the grounds that it helps prevent securities fraud by making it more difficult for fraudsters to attract investors or unscrupulous issuers to


10 JOBS Act Quick Start


condition the market.21


The 499-shareholder cap Issa raised concerns about the 499-shareholder cap under section 12(g) of the Exchange Act as being a fundamental roadblock to private equity capital formation. The letter went on to cite the case of the Facebook equity issuance in which the 499-person threshold would have been overcome by grouping multiple shareholders into single entities. He questioned whether the use of special purpose vehicles (SPVs) for the purposes of facilitating investments in private companies resulted in disjointed or illiquid markets and prevented price discovery. In her letter, Schapiro stated that Rule 12(g) of the


Exchange Act was enacted by Congress in 1964 and that the securities markets have changed significantly since then. The section requires a company to register its securities with the SEC within 120 days after the last day of its fiscal year if, at the end of the fiscal year, the securities are “held of record” by 500 or more persons and the company has “total assets” exceeding $10 million. Schapiro pointed out that today, the vast majority of shares of public companies are held in nominee or so-called street name and, as a result, individual shareholders are not counted because the securities are not held of record by those individuals. Conversely, in private companies, shareholders generally hold their shares directly, or of record, and thus those companies may exceed the 499-shareholder limit under Rule 12(g), which would require them to commence reporting. Schapiro stated in her letter that the issue of how holders are counted and how many holders should trigger registration will need to be examined. In his letter, Issa also raised concerns about Rule 12g5-


1(b)(3) of the Exchange Act. That rule states that if an issuer knows that the form of holding securities of record is primarily used to circumvent section 12(g), the beneficial holders will be deemed the record owners. Noting that this rule has been invoked sparingly, Schapiro stated that this rule is not meant to create uncertainty for issuers but rather is intended to prevent issuers from circumventing the registration requirements. Schapiro also noted that Congress has provided the SEC


with broad authority, in sections 12(h) and 36 of the Exchange Act, to make exemptions with respect to the section 12(g) registration requirements and that section 12(g) of the Exchange Act also allows the SEC to define the terms “held of record” and “total assets.” Therefore, the SEC has the requisite authority to revise the shareholder threshold if it concludes that doing so is not inconsistent with the public interest or protection of investors.


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