JOBS Act Quick Start

In our recently published book, JOBS Act Quick Start (published by the International Financial Law Review), we provide readers with a context for understanding the significance of the Jumpstart Our Business Startups (JOBS) Act as both a recognition of the changes in capital markets over the last decade and catalyst for a broader dialogue regarding financing alternatives.

Almost one year after enactment, the JOBS Act remains of interest to many companies, counsel, commentators and the popular press. The JOBS Act, which was adopted into law on April 5, 2012, caught many by surprise. The legislation seemed to make its way rapidly through a highly partisan and divided Congress that had largely been unable to reach consensus on many more undoubtedly pressing issues. However, as we discuss in our book, relatively little attention was paid to the almost two years of legislative activity that preceded the adoption of the Act, much of which sought to facilitate offerings by smaller companies through exempt offerings, while at the same time pursuing options designed to allow companies to stay private longer. Although the JOBS Act incorporates a number of changes to the exempt offering framework, these were quickly overshadowed by the “IPO on-ramp” provisions contained in Title I of the Act. Both the on-ramp and other provisions of the JOBS Act serve as the first real recognition on the part of legislators and regulators that the traditional growth cycle for emerging companies in the United States has changed fundamentally. As we discuss, for a very long time in the United States, a company’s financing life cycle was fairly predictable. A growing company could finance its development first with angel investors and friends and family rounds, and then with investments from venture capital funds. This path would be expected to culminate in an initial public offering, and the IPO would be seen as a decisive turning point for the company. An IPO also provided a liquidity opportunity for employee option holders and venture investors. Unfortunately, this orderly path has largely been disrupted due to a variety of factors. Whether as a result of increasingly burdensome regulations, heightened litigation risk, the public scrutiny that accompanies life as a public company, or fundamental market structure changes, more and more companies have chosen to defer an IPO in favor of greater reliance on additional private financing, as well as merger and acquisition opportunities for achieving liquidity or an exit for investors. At the same time, “restricted securities” have become more marketable—with the shortened Rule 144 holding period, the development of private secondary trading markets, and the growth of private funds all contributing to a lower “liquidity” discount once associated with restricted securities.

The JOBS Act attempts, through the accommodations provided to “emerging growth companies,” to recalibrate the balance and facilitate IPOs for companies with under $1 billion in revenue. However, in this respect, the JOBS Act may only be the first step, and additional reforms may be needed in order to effectuate real change. For example, the JOBS Act does not directly address the business model questions that impact research coverage and secondary market support. Instead, Title I of the JOBS Act focuses on making the IPO process more palatable with a confidential SEC review process, reduced disclosure requirements and more flexible communications around the time of the IPO, through test-the-waters communications with qualified institutional buyers and institutional accredited investors, and the possibility for the publication of broker-dealer research at the time of the IPO. While not all of these benefits of the JOBS Act have been utilized by companies and financial intermediaries, the expanded communications and scaled disclosures raise considerations about the extent to which benefits extended to emerging growth companies and well-known seasoned issuers should also find their way to other public companies, regardless of size.

In our discussion of the JOBS Act provisions related to offerings under Rule 506 of Regulation D and Securities Act Rule 144A (Title II), crowdfunding (Title III), Section 3(b)(2) or “Regulation A+” exempt public offerings up to $50 million (Title IV), and the Exchange Act holder-of-record threshold (Titles V and VI), we emphasize that the JOBS Act may prove to have a more lasting impact on private or exempt offerings than it may have on the IPO market. Once implementing rules are adopted, Title II will relax the prohibition on general solicitation for certain Rule 506 offerings and Rule 144A offerings, which is an important step in modernizing the communications regime under the Securities Act. It also contributes to a further blurring of lines between “private” and public offerings. Once implemented, an issuer or the financial intermediary acting on the issuer’s behalf will be able to reach investors having no pre-existing relationship with the company or the intermediary, as long as the issuer has verified that all purchasers are accredited investors. Hybrid financings, such as PIPE transactions and registered direct offerings, that combine certain characteristics typically associated with private placements and certain characteristics typically associated with public offerings, already are important financing tools. The relaxation of the ban on general solicitation, and the introduction of crowdfunding and a modernized Regulation A-style exempt public offering, will provide other hybrid alternatives to today’s capital-raising options. Of course, the changes in the Exchange Act reporting threshold and the almost certain boom in activity in secondary trading markets are likely to contribute to more reliance on private offerings as a capital-raising technique. What is all of this likely to mean? For securities lawyers, these changes challenge many basic principles and will lead to a fair amount of new thinking regarding the private/public divide (if one remains), as well as consideration of disclosure requirements for companies that are “private” but for which active secondary markets exist.