Senate Passes JOBS Act
- With surprisingly little fanfare, the U.S. Senate, by a vote of 73 - 26, today passed its version of H.R. 3606, the proposed Jumpstart Our Business Startups Act. Despite its name, the JOBS Act has no obvious connection to jobs; it is a securities law bill and would extensively deregulate the offering and private placement provisions of the Securities Act of 1933. The bill now goes back to the House of Representatives, which passed a somewhat different version of the bill by a 390 - 23 vote on March 8. While this normally would result in a conference committee, House Majority Leader Eric Cantor has announced that he intends to schedule a vote on the Senate-amended bill early next week in order to get the bill to President Obama without delay. The President's press secretary issued a statement in support of the bill as amended by the Senate, and the President is expected to sign it into law.
The bill would make a number of important changes to the federal securities laws:
Regulation D Private Placements (Title II): Because of its importance, I put this title first. The proposed statute would require the Securities and Exchange Commission to revise its rules to provide that the prohibition against general solicitation or general advertising shall not apply to offers and sales of securities made pursuant to Rule 506 of Regulation D, provided that all purchasers of the securities are accredited investors. This is a fundamental change to the private placement process and is certain to have wide ramifications. Rule 144A private placements would also be allowed to have general solicitation and general advertising. The bill says that the SEC rule change shall be not later than 90 days after the date of enactment. In practice, however, the SEC often misses these deadlines.
Emerging Growth Companies (Title I): The bill would ease a number of requirements for "emerging growth companies," which generally refers to an issuer with total annual gross revenues of less than $1 billion. Of course, most companies that go public would meet this test. A company would no longer be an emerging growth company once it crossed the $1 billion threshold, had been a public company for five years, issued more than $1 billion in nonconvertible debt in a three-year period, or became a large accelerated filer under SEC rules. Emerging growth companies would be exempt from say-on-pay and certain compensation disclosure requirements; would only need to provide two years of audited financial statements; would not be required to comply with new or revised financial standards, unless the standards apply to nonpublic companies; would not be required to obtain auditor attestation of their internal control assessment; would not be subject to Public Company Accounting Oversight Board rules adopted after the date of enactment, unless the SEC determines that the additional requirements are necessary or appropriate in the public interest; would be able to have test-the-water communications with institutional investors; and would be able to submit a draft registration statement to the SEC for confidential nonpublic review prior to public filing. The bill would also preempt SEC and FINRA rules governing securities analysts' research reports with respect to emerging growth companies. Emerging growth companies would include issuers whose first sale of common equity securities occurred after December 8, 2011, so some companies that are presently public would have the benefit of these provisions.
Crowdfunding (Title III): The one amendment to the House bill made by the Senate was to replace the House's crowdfunding title with a new title, designated the "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012" or the "CROWDFUND Act" - an impressive meshing of title with desired acronym, and distinctly less contrived than the USA PATRIOT Act, whose name took a similar approach. As amended, this title would allow issuers to raise up to $1 million per year from small investors, with a limit on the total amount raised from each investor based on the investor's income. Issuers using this exemption would have reduced disclosure requirements and would have the same exemption from state securities law regulation that is available for Regulation D private placements. However, there would be disclosure and SEC filing requirements, and issuers would be subject to liability for misstatements and omissions under Section 12(a)(2) of the 1933 Act. Public companies, investment companies, and private funds of all sorts would be ineligible for the exemption. The transaction would have to be conducted through an intermediary, either a broker or a funding portal (essentially, a broker that limits its brokerage activities to crowdfunding, registers with the SEC, and becomes a FINRA member). The bill would require the SEC to adopt implementing rules within 270 days.
Small Issues Exemptive Authority (Title IV): The bill would direct the SEC to add a regulatory exemption for offerings not in excess of $50 million in a 12-month period, somewhat similar to but more generous than existing Regulation A, which is limited to $5 million. The bill does not provide a deadline for the SEC to act.
1934 Act Registration Threshold (Titles V and VI): Issuers generally are required to register under the Securities Exchange Act of 1934 if they have 500 or more holders of record of a class of equity security. Title V effectively would increase this threshold by excluding accredited investors, persons who received the securities in exempt transactions pursuant to an employee compensation plan, and crowdfunding investors. There would also be a 2000-holder threshold, including accredited investors. This change apparently would be immediately effective. Title VI would make a 2000-holder limit applicable to banks and bank holding companies (i.e., they would not be subject to a 500-unaccredited-investor threshold). Oddly, Title VI contemplates implementation by SEC regulations not later than one year after enactment; it is not clear why implementing rules are required for Title VI, but not Title V.
Although the bill has been described as an "IPO on-ramp," it is likely to reduce the number of initial public offerings, at least insofar as domestic issuers are concerned. The changes to Regulation D and Rule 144A, and to a lesser extent the changes in Titles III and IV, will make unregistered offerings far more attractive, and the higher registration threshold under the 1934 Act will make fewer companies feel that they should have a public offering because they are threatened with 1934 Act registration anyway. While the exemptions for emerging growth companies will make it somewhat easier for most companies to go public, a public offering will remain an expensive proposition for issuers, and one that many issuers will now feel that they can forgo.
In spite of the lop-sided votes in Congress, the JOBS Act is controversial, with support from business groups but opposition from investor groups. SEC Chairman Mary Schapiro wrote a letter expressing concerns about a number of its provisions on March 13; these concerns were not addressed, except with respect to crowdfunding. It is in any case remarkable to see such an extensive deregulatory bill so soon after 2010's Dodd-Frank Act. It would perhaps be less surprising if the JOBS Act reversed regulation added by the Dodd-Frank Act. It does not, although it does cut back on several of the provisions of the Sarbanes-Oxley Act of 2002.
The THOMAS page on H.R. 3606, with links to its text and additional information, is at
At this writing, a print of the bill that includes the Senate amendment to Title III is not yet available. The amendment is SA 1884, printed in pages S1806 - 08 of the Congressional Record (Mar. 19, 2012). In addition, Chairman Schapiro's letter is on pages S1698 - 99 and also S1722 - 23 of the Congressional Record (Mar. 15, 2012), which also has other letters from commenters on that date. The Congressional Record is available at
For the statement by the White House press secretary, see
Majority Leader Cantor's statement is at
John M. Baker <JMB@...>
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