PRESIDENT SIGNS THE JOBS ACT INTO LAW TO SIMPLIFY                            CAPITAL FORMATIONA.     IntroductionPresident...
providing for certain disclosure obligations and other requirements to be phased in over a five-year period following the ...
Securities Act, to determine whether such persons might have an interest in an    IPO or other contemplated securities off...
accounting standard, however, it must advise the SEC of that choice and must               comply with all of the financia...
•   comply with any other terms or conditions established by the SEC, which may include         requirements that the issu...
The JOBS Act specifically amended the definition of “held of record” so as to not includesecurities held by persons who re...
Specifically, the new “crowdfunding” exemption promulgated by the JOBS Act:      •      creates a new exemption that would...
requires an issuer to file with the SEC, not less than annually, and provide to investorsreports of the issuers results of...
•        requires the dollar amounts in such exemption, as well as those that govern the                 type of financial...
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President Signs the JOBS Act into Law to Simplify Capital Formation

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President Signs the JOBS Act into Law to Simplify Capital Formation

  1. 1. PRESIDENT SIGNS THE JOBS ACT INTO LAW TO SIMPLIFY CAPITAL FORMATIONA. IntroductionPresident Obama signed into law last week the Jumpstart Our Business Startups Act (the “JOBSAct”). This new legislation is intended to spur job creation and economic growth by making iteasier for smaller companies to raise public and private capital in the U.S. financial markets.Among the most significant provisions in the JOBS Act is the creation of a new category ofissuers called “emerging growth companies” (“EGCs”) that would be exempt from certainregulatory requirements for a limited period of time in an effort to encourage them to go publicin the U.S. The JOBS Act also includes other measures intended to ease private capitalformation.In general, the JOBS Act: • provides relief to EGCs from various requirements and other restrictions applicable to initial public offerings (“IPOs”) and (on a transitional basis, for up to five years) from certain public company periodic reporting obligations; • removes the prohibition on general solicitation in connection with private offerings effected pursuant to Rule 506 or Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), provided that sales are limited to qualifying investors; • alters the thresholds that trigger registration of an issuer’s securities under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including a different threshold for banks and bank holding companies; • authorizes the Security and Exchange Commission (“SEC”) to increase the amount permitted to be raised in a Regulation A offering from $5 million to $50 million in any 12-month period; and • adds a “crowdfunding” exemption to the Securities Act.Many of the JOBS Act’s provisions became effective upon signing by the President on April 5,2012.A summary of the JOBS Act’s more significant provisions are described below.B. Facilitation of Capital Formation by “Emerging Growth Companies”The JOBS Act creates a new category of issuer, the EGC, that provides for modified disclosureobligations and flexibility in other requirements in connection with such issuer’s IPO, as well as
  2. 2. providing for certain disclosure obligations and other requirements to be phased in over a five-year period following the issuer’s IPO.An EGC is defined as an issuer with total annual gross revenues of less than $1 billion (subject toinflation adjustments by the SEC every five years) during its most recently completed fiscal year.All companies that qualify as EGCs will have the option to pursue an IPO process that isintended to be more streamlined than what current rules require. An EGC retains its status untilthe earliest of: • the last day of the fiscal year during which it had total annual gross revenues of $1 billion or more; • the last day of the fiscal year following the fifth anniversary of the issuer’s IPO; • the date on which the issuer has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or • the date on which the issuer is deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act.In connection with the registration of securities in an IPO and with respect to its ongoingdisclosure obligations during the five-year phase in period after becoming a public company, anEGC will enjoy the following exemptions from, and modifications of, disclosure requirementsand accounting and auditing standards, many of which became effective upon passage of theJOBS Act: • Reduced Audited Financial Statement Requirements, Selected Financial Data and MD&A Disclosures. - Audited financial statements will be required for only two fiscal years in an EGC’s registration statement for its IPO. - Selected Financial Data will be required for only the fiscal years that were audited in an EGC’s registration statement for its IPO. - Management’s Discussion and Analysis of Financial Condition and Results of Operations will be required for only the audited years in an EGC’s registration statement for its IPO. • Testing the Waters--The JOBS Act permits an EGC or its agent to communicate with potential investors, either orally or in writing, that are “qualified institutional buyers” (“QIBs”), as defined under Rule 144A of the Securities Act, or institutions that are accredited investors, as defined under Rule 501 of the -2-
  3. 3. Securities Act, to determine whether such persons might have an interest in an IPO or other contemplated securities offering, either prior to or after the date of filing of a registration statement with the SEC with respect to such offering.• Confidential Filing of Registration Statements--An EGC will be able to submit to the SEC a draft registration statement for an IPO on a confidential basis and for a confidential nonpublic review by the staff of the SEC, provided that the initial confidential submission and all amendments thereto are publicly filed with the SEC not later than 21 days before the date on which the issuer conducts a road show.• Say on Pay/Golden Parachute Disclosures-- An EGC will not be required to comply with the say-on-pay and say-on-golden parachute requirements adopted by the SEC pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).• Internal Control Auditor Attestation--The requirement to file a report of its independent registered public accounting firm on its internal control over financial reporting will not be required for an EGC; however, an EGC will be required to have internal control over financial reporting and its management will have to report on the adequacy of the company’s internal control over financial reporting after the company has filed with the SEC its first annual report on Form 10-K.• Reduced Executive Compensation Disclosures--Executive compensation information will be presented in the limited format required for “smaller reporting companies.” (A “smaller reporting company” is a company with a public float of less than $75 million as of the last day of its most recently completed second fiscal quarter.) In addition, an ECG will not be subject to the rules that the SEC adopts to implement the Dodd-Frank pay-for-performance and pay equity disclosure requirements.• Exemption from Future PCAOB Rules--With respect to the audit of an EGC, the JOBS Act exempts such company’s independent registered public accounting firm from complying with any rules adopted by the Public Company Accounting Oversight Board (“PCAOB”) after the date of the JOBS Act’s enactment, except as otherwise required by SEC rule. The JOBS Act exempts EGCs from any requirement adopted by the PCAOB for mandatory rotation of the accounting firm or for a supplemental auditor report about the audit and the company’s financial statements.• Impact of Choice to Comply with Rules for EGCs--An EGC has the option of choosing to comply with requirements that apply to public companies that are not EGCs. If an EGC chooses to comply with any new or revised financial -3-
  4. 4. accounting standard, however, it must advise the SEC of that choice and must comply with all of the financial accounting standards that are applicable to public non–EGCs and may not simply “cherry-pick” those that it wishes to comply with.C. Expansion of Regulation A Registration Statement Exemption for Public Offeringsof Up to $50 MillionThe JOBS Act amends the small issuer exemption in Section 3(b) of the Securities Act to permitthe SEC to amend Regulation A to, among other things, increase the aggregate offering amountof securities offered and sold within any 12-month period in reliance on such exemption from $5million to $50 million. In general, the Regulation A exemption provides for the following: • This exemption has been referred to as a “short form” registration because it required the filing of an offering statement with the SEC, which is subject to review by the SEC Staff and must be delivered to prospective investors. • The Regulation A exemption is generally available for any United States or Canadian entity that (i) has its principal place of business in the United States or Canada and (ii) is not a public company subject to reporting obligations with the SEC. • Until now, Regulation A offerings did not preempt the state securities registration laws, with the result that all applicable state securities law requirements had to be complied with in addition to meeting the federal requirements.Due principally to the offering size limit and state law issues, Regulation A has rarely been usedhistorically.Securities covered by the new exemption include equity securities, debt securities, and debtsecurities that are convertible or exchangeable to equity interests, including any guarantees ofsuch securities. Securities sold pursuant to the new exemption will preempt state securitiesregistration laws, only if (i) the securities are offered or sold on a national securities exchange or(ii) the securities are offered or sold to “qualified purchasers” (as defined by the SEC). Stateswill retain jurisdiction with respect to fraud and deceit or unlawful conduct by a broker or dealerin connection with an offering under this new exemption.The new exemption will also permit issuers to solicit interest in the offering prior to filing anyoffering statement pursuant to specified terms and conditions.The new exemption will be subject to the requirement that the issuer: • file audited financial statements annually with the SEC; and -4-
  5. 5. • comply with any other terms or conditions established by the SEC, which may include requirements that the issuer file with the SEC and distribute or make available to investors an offering statement and post-offering periodic disclosures regarding its business operations, financial condition, corporate governance principles, and other matters.In addition, the JOBS Act provides that the civil liability provision in Section 12(a)(2) of theSecurities Act will apply to any person offering or selling securities pursuant to the newexemption.D. Higher Shareholder Threshold for Exchange Act RegistrationThe JOBS Act increases the number of shareholders that can invest in a private company from500 to 2,000, before triggering the registration requirements under the Exchange Act. Section12(g) of the Exchange Act and the rules promulgated thereunder currently require an issuer toregister a class of equity securities with the SEC if, on the last day of the issuer’s fiscal year,such class of equity securities is held of record by 500 or more persons and the issuer has totalassets of more than $10 million. Upon a company registering a class of equity securities underSection 12(g) of the Exchange Act, all of the reporting and other requirements under theExchange Act apply with respect to that company.The JOBS Act amends the registration threshold, with specific requirements for issuers that arebanks or bank holding companies and separate requirements for all other issuers. • An issuer that is a bank or bank holding company will now become subject to Exchange Act requirements if, on the last day of its fiscal year, the issuer has total assets exceeding $10 million and a class of equity securities held of record by 2,000 or more persons. • In the case of a bank or a bank holding company, the issuer will no longer be subject to Exchange Act requirements if the number of record holders falls below 1,200 persons. • For all other types of issuers, an issuer will now become subject to Exchange Act requirements if, on the last day of its fiscal year, the issuer has total assets in excess of $10 million and a class of equity securities held of record by either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. • An issuer that is not a bank or a bank holding company will no longer be subject to Exchange Act requirements if the number of record holders falls below 300 persons (which did not change from the specified threshold prior to the JOBS Act). -5-
  6. 6. The JOBS Act specifically amended the definition of “held of record” so as to not includesecurities held by persons who received their securities pursuant to an employee compensationplan in transactions exempt from federal registration requirements. The SEC is required toamend its rules to implement that change in the definition of “held of record.” Additionally, theJOBS Act directs the SEC to issue rules exempting securities acquired pursuant to the newcrowdfunding exemption (discussed below) from the minimum shareholder threshold forExchange Act registration.E. Relaxed Manner of Offering Restrictions on Private PlacementsThe JOBS Act eliminates the prohibition on widespread advertising and other forms of generalsolicitation in private securities offerings under Rule 506 of Regulation D or Rule 144A underthe Securities Act, provided that ALL purchasers of the securities are accredited investors (asdefined in Rule 501 of Regulation D) or qualified institutional buyers (“QIBs”) (as defined inRule 144A). • Previously, advertising or general solicitation of prospective investors, such as by publishing information about a private placement on the internet or through any publication or broadcast, was not permitted. • The JOBS Act now requires issuers of securities to take reasonable steps to verify that purchasers are accredited investors or QIBs, using methods to be determined by the SEC. - Previously, it was sufficient for issuers to rely on investors self-certifying that they qualified as accredited investors or QIBs. The SEC is required to amend it rules to implement these changes.In addition, the JOBS Act clarifies that Internet-based and other platforms that match prospectiveinvestors with businesses raising capital will not be required to register as a securities broker dueto their matching services in connection with securities offered and sold in reliance on Rule 506. • This exemption is ONLY available if the matching service and its personnel do not receive compensation in connection with the purchase or sale of securities, do not hold customer funds and are not subject to “bad actor” disqualifications.F. CrowdfundingThe JOBS Act exempts from the Securities Act registration requirements certain “crowdfunding”transactions. “Crowdfunding” is a new outgrowth of social media that describes a capital-raisingstrategy whereby groups of people pool money, composed of small individual contributions, tosupport accomplishment of a particular goal. Today, there is increasing interest in crowdfundingas a means of offering investors an ownership interest in an early-stage or small company. -6-
  7. 7. Specifically, the new “crowdfunding” exemption promulgated by the JOBS Act: • creates a new exemption that would permit non-reporting issuers to raise up to $1 million in reliance on the exemption within any 12-month period, with a maximum investment per investor of: - the greater of $2,000 or 5 percent of the investor’s annual income or net worth within any 12-month period (if either the investors annual income or net worth is less than $100,000); and - 10 percent of the investors annual income or net worth, not to exceed a maximum amount of $100,000 (if either the investors annual income or net worth is equal to or more than $100,000); • requires that a transaction be conducted through a broker or “funding portal” (defined as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others pursuant to this exemption that meets certain conditions (including not offering investment advice or recommendations, not soliciting purchases, sales or offers to buy securities offered or displayed on its website or portal and not compensating employees and others for such solicitation or based on the sale of securities)); • does not permit an issuer to advertise the terms of the offering, except for notices that direct investors to the broker or funding portal; • requires an issuer to file with SEC and provide to investors and the intermediary specified information: - about the issuer, including a description of the issuers business, anticipated business plan and financial condition, which would include audited financial statements (if the offering, together with all other offerings of the issuer pursuant to this exemption within the preceding 12- month period have, in the aggregate, target offering amounts of more than $500,000, or such other amount as the SEC may establish by rule); - about the transaction, including the target offering amount, the deadline to reach the target amount, the price, the use of proceeds and risks to purchasers; • provides for a civil liability provision for material misstatements in, or material omissions from, an offering document or oral communications involved in the offer or sale of securities; -7-
  8. 8. requires an issuer to file with the SEC, not less than annually, and provide to investorsreports of the issuers results of operations and financial statements (as determinedappropriate by the SEC);• treats securities offered as “covered securities,” thereby pre-empting registration under state blue sky laws;• requires the SEC, by rule, to exempt, conditionally or unconditionally, securities acquired pursuant to this exemption from the provisions of Exchange Act Section 12(g);• requires a person acting as a broker or funding portal intermediary to take certain actions, including to: - register with the SEC as a broker or funding portal and register with any applicable self regulatory organization; - provide such disclosures, including those related to risks and other investor education materials, as the SEC by rule will determine appropriate, and ensure that investors review such disclosures, affirm risk of loss and answer various questions; - take such measures to reduce risk of fraud, as will be established by the SEC, including background and regulatory checks on directors, officers and significant shareholders of issuers; - make available to the SEC and to potential investors any information provided by the issuer to investors and intermediaries, not later than 21 days prior to the first day on which securities are sold to any investor; and - make such efforts as the SEC determines appropriate by rule to ensure that no investor in a 12-month period has purchased securities offered pursuant to this exemption that, in the aggregate, from all issuers, exceed the investment limits set forth above;• requires the SEC, by rule, to exempt, conditionally or unconditionally, a funding portal that is a member of a national securities association registered under Exchange Act Section 15A from the requirement to register as a broker or dealer under Exchange Act Section 15(a)(1);• restricts transfer of securities issued and sold under such exemption for one year (unless the securities are resold to the issuer, an accredited investor, as part of a registered offering or to a family member of the purchaser under limited circumstances); and -8-
  9. 9. • requires the dollar amounts in such exemption, as well as those that govern the type of financial information to be provided to investors and intermediaries, to be adjusted by the SEC not less frequently than once every five years.G. Effective DatesMost of the provisions of the JOBS Act are effective immediately upon enactment, including theexemption for EGCs and the availability of general solicitation and general advertising in Rule 506offerings. Other provisions require implementation by rulemaking, such as the new exemption forcrowdfunding offerings and offerings that do not exceed $50 million. Senior SEC staff members haveindicated that the staff will likely provide guidance on effective date issues shortly after enactment.This Alert does not constitute legal advice and counsel should be consulted regarding specific factual situationswhich will determine the compliance advice applicable to any particular question regarding the subject matter. Ifyou would like additional information or advice and counsel on training, compliance or audits, please let us know. -9-

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