Jumpstart Our Business. Startups (JOBS) Act. March 30, Morrison & Foerster LLP All Rights Reserved mofo.com

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1 Jumpstart Our Business 2011 Morrison & Foerster LLP All Rights Reserved mofo.com Startups (JOBS) Act March 30, 2012

2 The JOBS Act Background The Jumpstart Our Business Startups Act, H.R. 3606, was passed by the House on March 8, On March 22, 2012, the Senate passed H.R with an amendment to Title III (crowdfunding). On March 27, 2012, the House accepted the Senate s amendment and the legislation went to the President to be signed. The JOBS Act was the culmination of a year-long bipartisan effort in both the House and Senate to address concerns about capital formation and unduly burdensome SEC regulations. This is MoFo. 2

3 Overview This is MoFo. 3

4 JOBS Act Title I, Reopening American Capital Markets to Emerging Growth Companies. Most commonly referred to as the "IPO On-Ramp" legislation, this Title is meant to encourage smaller companies to go public through a process where public company obligations would be phased in over time. Title II, Access to Capital for Job Creators. This Title will remove the prohibition against general solicitation and general advertising in private offerings under Regulation D, provided that all of the purchasers of securities are accredited investors. The Title also addresses certain broker-dealer issues for intermediaries. Title III, Crowdfunding. This Title will provide an exemption for crowdfunding, by permitting offerings up to $1 million. Requirements targeted at investor protection are imposed on the issuer and the intermediary involved in the crowdfunding effort. The Title also addresses certain broker-dealer issues for intermediaries. Title IV, Small Company Formation. This Title is what is commonly referred to as Regulation A reform, and it creates a new exemption for offerings up to $50 million. Title V, Private Company Flexibility and Growth. This Title increases the Exchange Act registration shareholder of record threshold from 500 to 2,000 (only 500 of which can be non-accredited investors). Title VI, Capital Expansion. This Title increases the shareholder of record threshold from 500 to 2,000 for banks and bank holding companies, and would provide that a bank or bank holding company could terminate 1934 Act registration if the number of holders of record drops to less than 1,200. This is MoFo. 4

5 Title I: Emerging Growth Companies This is MoFo. 5

6 Emerging Growth Company Defined Title I amends Section 2(a) of the Securities Act and Section 3(a) of the Exchange Act by creating a new category of issuer called an emerging growth company. An emerging growth company is an issuer with total annual gross revenues of less than $1 billion (with such threshold indexed to inflation every five years), and would continue to have this status until: (i) the last day of the fiscal year in which the issuer had $1 billion in annual gross revenues or more; (ii) the last day of the fiscal year following the fifth anniversary of the issuer s initial public offerings; (iii) the date on which the issuer has, during the previous 3-year period, issued more than $1 billion in nonconvertible debt; or (iv) the date when the issuer is deemed to be a large accelerated filer as defined by the SEC. An issuer will not be able to qualify as an emerging growth company if it first sold its common stock in an IPO prior to December 8, This is MoFo. 6

7 Emerging Growth Company Benefits Permits filing a registration statement with the SEC on a confidential basis. Expands the range of permissible pre-filing communications made to qualified institutional buyers or institutional accredited investors. Requires emerging growth companies to provide only two years of audited financial statements to the SEC (rather than three years), and delays the auditor attestation on internal controls requirement. Exempts emerging growth companies from the mandatory Say-on-Pay vote requirement, and the Dodd-Frank Act required CEO pay ratio rules (to be adopted by the SEC), and permits the use of certain smaller reporting company scaled disclosure. An emerging growth company will not be required to comply with any new or revised financial accounting standard until the date that such accounting standard becomes broadly applicable to private companies. An emerging growth company would not be subject to any rules requiring mandatory audit firm rotation or a supplement to the auditor s report that would provide additional information regarding the audit of the company s financial statements (no such requirements currently exist). This is MoFo. 7

8 Emerging Growth Company Opt-In An emerging growth company may forego reliance on any exemption available to it. However, if it chooses to comply with financial reporting standards applicable to non-emerging growth companies, the emerging growth company must comply with all such standards and cannot selectively opt in or opt out of requirements. Any election must be made at the time the emerging growth company files its first registration statement or Exchange Act report. This is MoFo. 8

9 Research Title I allows brokers-dealers, even if they are participating in the underwriting process, to publish research reports about emerging growth companies. Title I also prohibits any SRO and the SEC from adopting any rule or regulation that would restrict a broker-dealer from participating in certain meetings relating to emerging growth companies. No SRO or the SEC may adopt any rule or regulation prohibiting a broker-dealer from publishing or distributing a research report or making a public appearance with respect to the securities of an emerging growth following the offering. This is MoFo. 9

10 Title II: General Solicitation This is MoFo. 10

11 General solicitation Over the years, there have been many proposals to address the prohibition against general solicitation. Title II directs the SEC to remove the prohibition against general solicitation and general advertising in offerings pursuant to Rule 506 under Regulation D, provided that the issuer verifies all of the purchasers of securities are accredited investors. General solicitation and general advertising will not be prohibited in secondary sales under Rule 144A so long as only QIBs are purchasers in the offering. The SEC must adopt rules within 90 days of enactment. This is MoFo. 11

12 Matching Services Title II clarifies that persons who maintain certain online or other platforms to conduct Rule 506 offerings that will use general advertising or general solicitation will not, by virtue of this activity, be required to register as a broker or a dealer pursuant to Section 15 of the Exchange Act, provided that certain specified conditions are satisfied. In order not to be subject to registration as a broker-dealer, these matching services or platforms must not receive transaction-based compensation, take possession of customer funds or securities, or participate in documentation. This is MoFo. 12

13 Title III: Crowdfunding This is MoFo. 13

14 Crowdfunding Crowdfunding permits entrepreneurs to pool money from individuals who have a common interest and are wiling to contribute to a venture. Crowdfunding may or may not involve the sale of securities. To the extent the effort involves the sale of securities then the offering must be registered or must rely on an exemption. This is MoFo. 14

15 Crowdfunding Title III provides an exemption that could apply to crowdfunding offerings, to be implemented by SEC rules adopted within 270 days. The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000. The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, does not exceed: the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or 10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000 This is MoFo. 15

16 Crowdfunding The transaction must be conducted through a broker or funding portal. Information will be filed and provided to investors regarding the issuer and offering, including financial information based on the target amount offered. The provision would prohibit issuers from advertising the terms of the exempt offering, other than to provide notices directing investors to the funding portal or broker, and would require disclosure of amounts paid to compensate solicitors promoting the offering through the channels of the broker or funding portal. Issuers relying on the exemption would need to file with the SEC and provide to investors, no less than annually, reports of the results of operations and financial statements. This is MoFo. 16

17 Crowdfunding A purchaser in a crowdfunding offering could bring an action against an issuer for rescission in accordance with Section 12(b) and Section 13 of the Securities Act, as if liability were created under Section 12(a)(2) of the Securities Act, in the event that there are material misstatements or omissions in connection with the offering. Securities sold on an exempt basis under this provision would not be transferrable by the purchaser for a one-year period beginning on the date of purchase, except in certain limited circumstances. The exemption would only be available for domestic issuers that are not reporting companies under the Exchange Act and that are not investment companies, or as the SEC otherwise determines is appropriate. Bad actor disqualification provisions similar to those required under Regulation A would also be required for exempt crowdfunding offerings. This is MoFo. 17

18 Crowdfunding Funding portals would not be subject to registration as a brokerdealer, but would be subject to an alternative regulatory regime, subject to SEC and SRO authority, to be determined by rulemaking by the SEC and SRO. A funding portal is defined as an intermediary for exempt crowdfunding offerings that does not: offer investment advice or recommendations; solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; compensate employees, agents, or other persons for such solicitation or based on the sale securities displayed or referenced on its website or portal; hold, manage, possess, or otherwise handle investor funds or securities; or engage in other activities as the SEC may determine by rulemaking. This is MoFo. 18

19 Crowdfunding The provision preempts state securities laws by making exempt crowdfunding securities covered securities, however, some state enforcement authority and notice filing requirements would be retained. State regulation of funding portals would also be preempted, subject to limited enforcement and examination authority. This is MoFo. 19

20 Title IV: New Regulation A-Style Exemption This is MoFo. 20

21 New Exempt Offering Title IV amends Section 3(b) of the Securities Act, substantially increasing the dollar threshold for a Regulation A-style offering. Pursuant to Section 3(b)(2), an issuer will be able to offer and sell up to $50 million in securities within a 12-month period in reliance on the exemption. The issuer may offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests, including any guarantees of such securities. The securities sold pursuant to the exemption will be offered and sold publicly (without restrictions on the use of general solicitation or general advertising) and will not be restricted securities. The issuer may test the waters or solicit interest in the offering prior to filing any offering statement with the SEC, subject to any additional conditions or requirements that may be imposed by the SEC. The securities will be considered covered securities for NSMIA purposes (and not subject to state securities review) if: the securities are offered and sold on a national securities exchange, or the securities are offered or sold to a qualified purchaser as defined under the Act. The civil liability provision in Section 12(a)(2) shall apply to any person offering or selling such securities. This is MoFo. 21

22 New Exempt Offering The SEC will require that the issuer file audited financial statements with the SEC annually. The SEC may impose other terms, conditions or requirements deemed necessary for investor protection, including a requirement that the issuer prepare and file electronically with the SEC and distribute to prospective investors an offering statement and any related documents, including a description of the issuer s business and financial condition, its corporate governance principles, the intended uses of proceeds, and other appropriate matters. The SEC also may require an issuer that relies on the exemption to make available to investors and file with the SEC periodic disclosures. The bad actor disqualification provisions applicable for the exemption shall be substantially similar to the disqualification provisions contained in the regulations adopted pursuant to Section 926 of the Dodd-Frank Act (which looks to the bad actor disqualification provisions in current Regulation A). This is MoFo. 22

23 Titles V and VI: Exchange Act Registration Thresholds This is MoFo. 23

24 Exchange Act Threshold Title V amends Section 12(g)(1)(A) of the Exchange Act and provides that an issuer will become subject to Exchange Act requirements within 120 days after the last day of its first fiscal year ended on which the issuer has total assets in excess of $10 million and a class of equity security (other than an exempted security) held of record by either: (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. This is MoFo. 24

25 Exchange Act Threshold Title VI adds a new Section 12(g)(1)(B) that provides that, in the case of an issuer that is a bank or a bank holding company, the issuer will become subject to Exchange Act requirements, not later than 120 days after the last day of its first fiscal year ended after the effective date of this amended section, on which the issuer has total assets exceeding $10 billion and a class of equity security (other than an exempted security) 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 reporting if the number of holders drops below 1,200 persons. The SEC must issue final regulations to implement these amendments within a year of the enactment. This is MoFo. 25

26 Exchange Act Thresholds The held of record definition in Section 12(g)(5) is amended and shall not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the Section 5 registration requirements. The SEC is required to implement this amendment by revising the held of record definition. The SEC also must adopt certain safe harbor provisions that issuers can follow to determine whether holders received securities pursuant to an employee compensation plan in exempt transactions. Securities sold in exempt crowdfunding offerings under Title III would also be excluded from the determination of record holders pursuant to rules to be adopted by the SEC within 270 days from enactment. This is MoFo. 26

27 Required Studies This is MoFo. 27

28 Required Studies Decimalization Within 90 days of enactment of the Act, the SEC must present to Congress the findings of a study that examines the impact of decimalization on IPOs and the impact of this change on liquidity for smalland mid-cap securities. If the SEC determines that securities of emerging growth companies should be quoted or traded using a minimum increment higher than $0.01, the SEC may, by rule later than 180 days following enactment of the Act, designate a higher minimum increment between $0.01 and $0.10. Regulation S-K The SEC, within 180 days of enactment, must report to Congress on its review of Regulation S-K and its recommendations concerning changes to registration requirements for emerging growth companies to address burdens. Blue Sky Laws and Regulation A - The Comptroller General, within 3 months of enactment, must report to Congress on its study of the impact of blue sky laws on Regulation A offerings. Section 12 SEC Enforcement Authority - The SEC, within 120 days of enactment, must report to Congress on its assessment regarding additional enforcement tools that may be needed for it to enforce anti-evasion provision in Section 12(b)(3). This is MoFo. 28