US Congress amends securities laws to facilitate capital formation
12 July 2012
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The Jumpstart Our Business Startups ("JOBS")
Act, enacted on 5 April 2012, is intended to relieve some
restraints on capital raising currently imposed by U.S. securities
laws. Unless an overseas company qualifies as a “foreign private
issuer", U.S. securities laws apply to foreign issuers in the same
way that they apply to U.S. issuers.
Emerging growth companies
The JOBS Act eases the initial and on-going
securities law compliance requirements for “emerging growth
companies” seeking a public quotation in the U.S. A company going
public in the U.S. with less than $1 billion in revenue is
considered an emerging growth company ("EGC"),
until five years from the IPO date or, if earlier, the time that
the company’s revenue exceeds $1 billion, its public float exceeds
$700 million, or it issues $1 billion in non-convertible debt.
Among other things, restrictions on
communications in connection with an emerging growth company IPO
are relaxed; an emerging growth company may file a draft IPO
registration statement confidentially; some disclosure requirements
are reduced; and an auditor’s attestation of the emerging growth
company’s report on financial controls is not required. In
addition, an EGC is permitted to approach qualified institutional
buyers ("QIBs") and institutional
accredited investors to determine their interest in a public
offering by the EGC, although the usefulness of this provision may
be limited by concerns with Rule 10b-5 and other anti-fraud
provisions of the securities laws, which the JOBS Act does not
abate.
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General solicitation and
advertisements
Most foreign issuers that seek to raise equity
finance in the U.S. will rely upon one of the exemptions from the
general requirement to register the offer or sale of the securities
and, accordingly, produce a registration statement.
Current Securities and Exchange Commission
rules prohibit companies from using any general solicitation (for
example, through advertisements) to sell unregistered securities.
The JOBS Act requires the SEC to amend two of its rules to permit
unregistered sales, to accredited investors (under Rule 506 of
Regulation D) and qualified institutional buyers (under Rule 144A),
through general solicitation or general advertising. This new rule
would, for example, enable a company, or a broker on a company’s
behalf, to raise money by newspaper advertisement or mass
solicitation, as long as the investors’ bona fides as accredited
investors were confirmed prior to sale. The exemption will become
available only when the SEC adopts implementing rules, required by
the beginning of July 2012. As the SEC has yet to issue a proposal,
it will not meet this deadline.
A person maintaining a “platform” for the
offer, sale, or negotiation of a sale of securities under the
amended rules would not be required to register as a broker-dealer,
if that person receives no compensation or does not have custody of
customer funds or securities in connection with the sale.
It is unclear whether many issuers will avail
themselves of the forthcoming facility to make a general
solicitation in respect of its securities. Current SEC staff
interpretations permit private placement websites already, but
require potential investors to be vetted as accredited investors
before being permitted to view any particular offering. In this
context, the new rules merely defer the vetting until an investor
decides to invest. In addition, offering participants, such as
local investment banks, normally have a large network of accredited
investors and QIBs and may well conclude that a general
solicitation or advertising would be unlikely to assist
significantly with the marketing exercise.
Offerings less than $50
million
The JOBS Act requires the SEC to create a
Securities Act exemption for an issuer’s securities sales of up to $50 million in a 12-month period. The
exemption is likely to be patterned after the existing Regulation A
exemption, which permits U.S. issuers not subject to the Exchange
Act reporting regime to make public sales of up to $5 million in
each 12 months.
Offerings under the new exemption generally
would be subject to state “Blue Sky” securities laws. The SEC is
given wide latitude to fashion disclosure requirements relating to
the new exemption, but there is no deadline by which the SEC is
required to adopt rules, so the exemption’s utility remains to be
seen.
“Crowdfunding” exemption
In addition to charitable or political
purposes, “crowdfunding” has been a means for funding startup
businesses or particular business projects, when contributors had
no investment intent and received no continuing interest in the
venture. The JOBS Act crowdfunding exemption permits a company to
sell publicly up to $1 million in investment securities in each 12
months, subject to per-investor limits and restrictions that appear
disproportionate to the small amounts that can be raised.
Elaborate disclosure, including audited
financial statements for offerings exceeding $500,000, must be
provided to investors and filed with the SEC, and sales may be made
only through a licensed broker or registered “funding portal".
These intermediaries, in turn, are made responsible, among other
things, for conducting background checks on the issuer’s
principals, ensuring investors understand investment risks, and
confirming that investors comply with their individual annual
investment limits. Given that greater sums can be raised more
easily under current law, much use of the crowdfunding exemption
seems unlikely.
Exchange Act registration
Prior to adoption of the JOBS Act, a company
with more than 500 record holders (and at least $10 million in
assets) was required to register under the Exchange Act and,
thereafter, to comply with periodic reporting and proxy
solicitation requirements (among others). The Act changes the
number to either 2,000 stockholders or 500 non-accredited
investors. Shares issued pursuant to employee compensation
plans and the crowdfunding exemption are excluded from the count.
Large private employers will be able to use stock compensation more
widely, without risking going public.
David C Fischer
is a partner in the New York office of Loeb & Loeb
LLP.