By David Cole, Partner, Holland & Knight
On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the JOBS Act) which includes a number of changes to fundamental U.S. federal securities law policies. The JOBS Act will create fundamental changes in the way some companies raise capital. Here are some of the things companies need to know about the JOBS Act and the way it will affect their business.
Under the new Act, middle-market company CEOs, CFOs and their investment bankers are afforded a spectrum of investment opportunities to consider including:
- raising small amounts of money using the Internet
- staying a private company longer and raising money in private placements from sophisticated investors
- raising significant sums of money, up to $50 million, in a 12-month period in a new Regulation A+ hybrid offering mechanism
- tapping the U.S. capital markets in an initial public offering sooner than management may have considered.
As a result, middle-market companies no longer need to look to overseas markets (such as the AIM), choose debt over equity or go to the well too many times by approaching the same array of private equity investors without tapping into the broader U.S. investing public.
The JOBS Act creates an on-ramp for middle-market, non-public companies to access the IPO markets. The JOBS Act grants a number of important holidays from some key Dodd-Frank and Sarbanes-Oxley regulations for a large number of newly designated “Emerging Growth Companies” (EGCs) and loosens a number of critical restrictions on underwriter marketing activities on behalf of EGCs. Some of the key changes include that EGCs:
- will remain exempt from the say-on-pay, say-on-frequency and golden parachute regulations in Dodd-Frank
- enjoyed scaled executive compensation disclosure
- will remain exempt from CD&A in go-forward proxy solicitations
- will not need their accountants to attest to the adequacy of the EGC’s internal controls
- need only present two rather than three years of audited financials in their IPO registration statements and prospectuses and two rather than five years of summary financial information
- enjoy scaled MD&A disclosure in post-IPO periodic reports and future registration statements
In an important shift in federal securities law, those seeking to raise capital for EGCs can test the waters by communicating with potential investors before a registration statement is file. Underwriters can have analysts speak directly with issuers and investors, and EGCs can file confidentially with the SEC an initial registration statement screening sensitive information about the company from the public.
To increase the number of companies that can take advantage of these policies, Congress defined an EGC broadly to include an incredibly large swath of the economic landscape. A business need not be small to qualify as an EGC.
In fact, middle-market, non-public companies with pre-money valuations ranging from approximately $200 million to approximately $600 million can qualify as an EGC and stand much to gain (based on key assumptions on growth, dilution and the company’s capitalization table). Because of this, we expect a significant percentage of U.S. IPOs in the near future will come from EGCs.
Once a company achieves ECG status, the company can maintain this standing for up to five years after closing its first sale of common equity. During this time, the EGC would prepare to comply with the provisions of Dodd-Frank and Sarbanes-Oxley that were temporarily suspended for the EGC by the JOBS Act.
If an ECG however, were to exceed $1 billion in gross revenue or sell more than $1 billion in non-convertible bonds over a three-year period, then a company would lose its EGC status on the last day of the fiscal year in which its gross revenues eclipsed $1 billion or immediately upon closing the tipping bond issuance. Also, if an ECG becomes a large accelerated filer, then the company would also lose its EGC status.
In our next post, we will take a closer look at the JOBS Act and its effect on the IPO market, and in future posts we’ll examine how companies can take advantage of raising large and small amounts of money with a new Regulation A+ hybrid offering mechanism and Crowdfunding.
For more detailed information on changes affecting issuers and emerging growth companies under the JOBS ACT, please see our April 2012 Public Companies Alert.
Holland & Knight is a global law firm with more than 1,000 lawyers in 18 U.S. offices as well as Abu Dhabi, Beijing and Mexico City. Holland & Knight is among the nation’s largest law firms, providing representation in litigation, business, real estate and governmental law. Interdisciplinary practice groups and industry-based teams provide clients with access to attorneys throughout the firm, regardless of location.