JOBS Act Reduces Capital Raising Burdens
Endeavoring to stimulate the economy, Congress passed, and on April 5, 2012, the President signed, the Jumpstart Our Business Startups Act (the “JOBS Act”). This law will have a significant effect on the rules governing capital-raising and securities registration for many companies. Key provisions of the JOBS Act include: the removal of certain marketing restrictions for private funds, a provision authorizing crowdsource business funding in relatively small amounts, and other provisions generally intended to facilitate capital-raising for businesses. Another significant piece of the JOBS Act increases the allowable number of shareholders that many companies, including banks and bank holding companies, are permitted to have before registration is required.
The important provisions of the JOBS Act increasing the shareholder threshold for securities registration serve to amend the Securities Exchange Act of 1934’s (the “Exchange Act”) registration requirements. Previously, most companies that had more than $10 million in assets and had more than 500 equity-holders (as defined under securities laws) were required to register under the Exchange Act. The JOBS Act amends the Exchange Act so that most private companies will be permitted up to 2,000 equity-holders before registration under the Exchange Act is required (unless more than 499 of the equity-holders are not accredited investors). These provisions apply to most private issuers, including, but not limited to, banks and bank holding companies.
The JOBS Act also amends the Exchange Act’s de-registration threshold, but these provisions are only applicable to banks and bank holding companies. When these provisions take effect, banks and bank holding companies who are already registered under the Exchange Act may de-register if the number of equity-holders of the bank or bank holding company falls below 1,200 equity-holders.
The JOBS Act also amends the Securities Act of 1933 (the “Securities Act”) to allow for crowdsource funding, or crowdfunding. The crowdfunding exemption contained in the JOBS Act is intended to allow companies to raise limited amounts of funding in small amounts from individual investors without triggering Securities Act registration requirements. This provision provides an exemption from the Securities Act registration requirements for transactions in which an issuer offers or sells their own securities. To rely on this exemption certain conditions must be satisfied. The issuer, for instance, must not have sold an aggregate amount of securities greater than $1,000,000 during the twelve-month period preceding the date of the exempt transaction. Also, attendant to the crowdfunding exemption are strict limitations on the amount of money an issuer can receive from any one investor. Additionally, any transaction relying on the crowdfunding exemption must be conducted through a broker or a funding portal (funding portals are certain outlets that will be established to comply with the terms of the crowdfunding exemption).
Another provision of the JOBS Act will serve to benefit companies that qualify as an emerging growth company. To qualify as an emerging growth company, the issuer must have had their initial public offering of common equity securities after December 8, 2011 and the company must have had less than $1 billion of total annual gross revenues during its last completed fiscal year. The JOBS Act relaxes many of the registration requirements for emerging growth companies, thereby making it simpler and less expensive for these companies to go public.
A number of other provisions in the JOBS Act affect how businesses can raise money. Most of the provisions of the JOBS Act will not be effective until they are implemented by SEC Rules. The implementing rules could substantially affect the legal significance of a number of the JOBS Act’s provisions. Thus, the import and effect of the JOBS Act is not yet clear. We will, as always, stay apprised of all of these developments and will continue to determine which avenues are optimal for our clients to raise capital.