Introduction M
any market participants were taken by surprise by the enactment of the Jumpstart Our Business Startups Act. The JOBS Act, HR 3606, was passed by the United States
House of Representatives on March 8 2012. On March 22, the Senate passed HR 3606 with an amendment to Title III (providing for the crowdfunding exemption with enhanced investor protections). On March 27, the House of Representatives accepted the Senate’s amendment, and on April 5, President Obama signed the JOBS Act into law. To many, this may sound like a quick path for legislation, especially when considered in the context of a Congress that seemed virtually deadlocked and unable to reach the consensus required to take action on pressing issues. When considered closely and in context, however, it becomes clear that the Act was the culmination of an at least year-long bipartisan effort in both the House and Senate to address concerns about capital formation and unduly burdensome Securities and Exchange Commission (SEC) regulations. The JOBS Act affects both exempt and registered offerings, as well as the reporting requirements for certain public issuers. A centrepiece of the Act is a new IPO on- ramp approach for a class of emerging growth companies (Title I), with confidential SEC staff review of draft IPO registration statements, scaled disclosure requirements, no restrictions on test-the-waters communications with qualified institutional buyers (QIBs) and institutional accredited investors before and after filing a registration statement, and fewer restrictions on research (including research by participating underwriters) around the time of an offering. In addition, the JOBS Act directs the SEC to amend its rules to: • eliminate the ban on general solicitation and general advertising in Rule 506 offerings when sales are only to accredited investors, along with comparable changes to Rule 144A (Title II);
• establish a small offering exemption for crowdfunding (Title III); and
• create a new exemption for offerings up to $50 million (Title IV). The JOBS Act also raises the holder-of-record threshold for mandatory registration under the Securities Exchange
Act of 1934, as amended (the Exchange Act) (Titles V and VI). In the chapters that follow, we discuss each of these measures in greater detail, but before we do so, it is important to understand the concerns that led legislators to act in concert to adopt the JOBS Act.
The lifecycle for emerging companies in the United States For a long time in the United States, a company’s financing lifecycle was generally fairly predictable. A growing company usually financed its business through investments from friends and family, then perhaps from angel investors, and finally, if the company was successful, from venture capital firms. Given the application of section 5 of the Securities Act of 1933, as amended (the Securities Act)1
to public offerings of securities, a company
was required to limit itself to conducting small rounds of financing, relying on various available exemptions from the registration requirements of the Securities Act, and to target principally sophisticated institutional investors. The securities that a company sold in these private or exempt offerings were classed as restricted securities, which means that the securities had never been offered pursuant to a registration statement and were subject to certain transfer restrictions. After various successful private financing rounds, the company’s management and venture investors would begin to consider an IPO. Once a company was an SEC-reporting issuer, it became subject to a comprehensive regulatory framework. Although this regulatory framework may have imposed requirements that seemed onerous (at the time), being a public company offered distinct benefits. Once public, a company generally had many more financing opportunities. Already public companies relied on raising additional capital to finance their growth through follow-on public offerings, underwritten by one or more investment banks. From time to time, an already public company also might conduct a private placement or other exempt offering as part of an overall financing plan. Over time, as the capital markets in the United States have undergone changes and as regulations have evolved, the cost-benefit calculus for many companies has changed. Many companies have
JOBS Act Quick Start 5
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