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Small Businesses: How the Jumpstart Our Business Startups (JOBS) Act Affects You

 

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"). This legislation is the culmination of significant efforts to amend several aspects of the federal securities laws that impact capital formation in the private and public markets by small businesses. This advisory highlights certain key provisions of the JOBS Act that affect smaller companies which seek to remain private.

  • General Solicitation and Advertising Allowed.
    • Smaller companies that need to raise capital often rely on Rule 506 of Regulation D, a "private offering" exemption from the requirement to register securities offerings with the Securities and Exchange Commission ("SEC") and state securities agencies. Prior to the JOBS Act, no issuer could engage in any form of general solicitation or advertising with respect to the securities being offered. The JOBS Act eliminates this ban under Rule 506, provided the issuer takes steps to ensure that all purchasers are "accredited investors."
  • Crowdfunding Exemption.
    • "Crowdfunding" is a way of describing a capital-raising strategy in which groups of people pool their capital, often composed of small individual contributions, to support a particular goal or organization. The JOBS Act creates a new exemption to allow private companies to raise up to $1 million within any 12-month period, with each investor being allowed to invest up to a certain amount. Numerous conditions apply, including a requirement that a crowdfunding transaction be conducted through a broker or a "funding portal" registered with the SEC, and that participating brokers and funding portals provide certain investor education materials. Issuers relying on this exemption must also register with the SEC and provide certain information at the time of the offering as well as annual financial statements following the offering.
  • Higher Shareholder Thresholds for Public Reporting.
    • Prior to the JOBS Act, any company with more than $10 million in assets was required to register as a public company with the SEC if any class of its equity securities was held by 500 or more persons. The JOBS Act raises this threshold to 2,000 shareholders, so long as no more than 499 shareholders are not "accredited investors." (Slightly different thresholds apply for banks and bank holding companies.) For purposes of this calculation, employee-shareholders who received their securities in an exempt transaction pursuant to an employee compensation plan are excluded. Upon the SEC's adoption of rules to implement the crowdfunding exemption described above, holders of crowdfunded securities also will be excluded.
  • Expanded Mini-Registration under Regulation A.
    • Regulation A is a scaled-back form of registration (or "mini-registration") with less disclosure and regulatory requirements than a full registered offering under federal law. Prior to the JOBS Act, private companies could raise up to $5 million under Regulation A. The JOBS Act requires the SEC to amend Regulation A (or create a new exemption similar to Regulation A) to allow private companies to raise up to $50 million within any 12-month period, provided the issuer files audited financial statements with the SEC annually and complies with certain other conditions (the full extent of which will be confirmed in the SEC's new rules). However, unless the securities are offered and sold on a national securities exchange or to "qualified purchasers," this provides an exemption under federal law only, so many issuers must still comply with (or find a suitable exemption from) registration requirements under state securities laws.

The JOBS Act amended other aspects of the federal securities laws, including those pertaining to accessing public markets via an IPO and phasing-in certain disclosure requirements applicable to public companies for qualifying businesses. 

© 2022 Varnum LLPNational Law Review, Volume II, Number 97
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About this Author

Michael G. Wooldridge, corporate attorney, Varnum
Partner

Mike is a partner on the firm's Corporate Practice Team and formerly served as the chair of the firm’s Policy Committee. His practice focuses on corporate governance, securities, and mergers and acquisitions. He represents several of the firm’s clients whose securities are traded publicly in corporate governance, securities law compliance and mergers and acquisitions. He has managed and led a variety of public equity and debt offerings for financial services and manufacturing companies. Mike is also active in advising clients in venture capital transactions.

As a...

616/336-6903
Harvey Koning, Varnum, M&A attorney, merger, acquisitions
Partner

Harvey is a partner and leads the Banking, Finance and Restructuring Practice Team. He represents a wide variety of businesses and has substantial experience with mergers, acquisitions and capital raising. Harvey’s practice includes acquisition transactions (domestic and international), family businesses, securities regulation and executive compensation. Harvey works closely with the Ally Law network of law firms throughout the world to assist clients with international legal needs. He has extensive experience concerning government regulation and other matters specific...

616-336-6588
Kimberly A. Baber, Varnum Law Firm, Grand Rapids, Corporate Contracting Attorney, Securities Matters Lawyer
Partner

Kim is an attorney in the Corporate Practice Group where she represents both publicly-traded and private businesses at all stages of growth in a variety of transactional matters. Although Kim regularly counsels clients on general contract and business law matters, she focuses her practice on securities law matters, corporate governance issues, and mergers and acquisitions. She has particular expertise in the community banking and financial services industry. She also has substantial experience representing companies and investor groups seeking to raise capital through the sale of debt and...

616/336-6851
Seth W. Ashby, Varnum Law Firm, Grand Rapids, Corporate Planning Attorney, Private Equity Lawyer
Partner

Seth is a partner and member of the firm’s Business and Corporate Services Team. He is experienced in business representation, planning and counseling. He focuses on mergers and acquisitions, as well as private equity, securities, distressed asset and restructuring, and commercial transactions. Seth also advises clients with respect to corporate governance, regulatory and other general corporate matters.

616/336-6726
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