JOBS Act 3.0

Glenn Pollner and Elizabeth Ising are partners and Thurston Hamlette is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Pollner, Ms. Ising, and Mr. Hamlette.

On July 17, 2018, the U.S. House of Representatives overwhelmingly passed, by a vote of 406-4, bipartisan financial reform legislation titled the “JOBS and Investor Confidence Act of 2018,” frequently referred to as JOBS Act 3.0. The JOBS Act 3.0 builds upon the 2012 Jumpstart Our Business Startups (“JOBS”) Act, and on the Fixing America’s Surface Transportation Act (the “FAST Act”), which was enacted in 2015 and is commonly referred to as JOBS Act 2.0.

The proposed JOBS Act 3.0, which had the backing of House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Ranking Member Maxine Waters (D-CA), still must be approved by the U.S. Senate. The legislation includes 32 individual bills that already passed the House Financial Services Committee or the House during this congressional term. Key provisions include:

1. Encouraging Public Offerings Act of 2017 (H.R. 3903) (Further Extension of JOBS Act IPO “On-Ramp”). Sponsored by Rep. Tedd Budd (R-NC) and Rep. Gregory Meeks (D-NY), this bill would amend the Securities Act of 1933 (Securities Act) to permit all companies to submit confidential draft registration statements for their initial public offerings (IPOs) to the Securities and Exchange Commission (SEC) for SEC staff review, as well as for securities offerings within one year of an IPO. Additionally, this bill would allow all companies to engage in “test-the-waters” activities with qualified institutional buyers and other institutional accredited investors in connection with securities offerings. The Securities Act currently permits an “emerging growth company” (EGC) to confidentially submit a registration statement in connection with its IPO and to engage in “test-the-waters” activities in connection with its securities offerings, although in June 2017 the SEC adopted a policy permitting non-EGCs to also confidentially submit registration statements for their IPOs and permitting all issuers to confidentially submit registration statements in connection with securities offerings within one year of an IPO. The text of H.R. 3903 can be found here.

2. Main Street Growth Act (H.R. 5877) (Creation of Venture Exchanges). Sponsored by Rep. Tom Emmer (R-MN), this bill would amend the Exchange Act of 1934 (Exchange Act) to allow for the creation of venture exchanges registered with the SEC to provide trading venues more tailored to the needs of small and emerging companies. Securities of “early stage growth companies” exempt from registration pursuant to Regulation A+, securities of EGCs and securities of certain other smaller issuers that are registered under Section 12(b) of the Exchange Act would be eligible for trading on a venture exchange. Securities traded on a venture exchange would not be permitted to trade on a national securities exchange during any period in which the venture security is traded on a venture exchange. The text of H.R. 5877 can be found here.

3. Improving Investment Research for Small and Emerging Issuers Act (H.R. 6139) (Study on Improving Investment Research Coverage for EGCs and Other Smaller Issuers). Sponsored by Rep. Bill Huizenga (R-MI) and Ranking Member Maxine Waters (D-CA), this bill would require the SEC to carry out a study to evaluate the issues affecting the provision of research coverage for small issuers and pre-IPO companies, including emerging growth companies and other small issuers. The study would be required to examine, among other topics, factors related to: the demand for such research by institutional and retail investors; the availability of such research (including the number and types of firms who provide such research); the costs of such research; the impacts of different payment mechanisms for investment research; the impact on availability of research coverage of broker and dealer concentration and consolidations, SEC rules, registered national securities association rules, federal and state liability concerns, the 2003 Global Analyst Research Settlement and MiFID II; and any unique challenges faced by minority-owned, women-owned and veteran-owned small issuers in obtaining research coverage. The SEC’s report would be required to provide recommendations to increase the demand for, volume of, and quality of investment research into small issuers, including emerging growth companies and companies considering initial public offerings. The text of H.R. 6139 can be found here.

4. Middle Market IPO Underwriting Cost Act (H.R. 6324) (Study on IPO Underwriting Fees). Introduced by Rep. Jim Himes (D-CT), this bill calls for the SEC to conduct a study on the direct and indirect underwriting fees, including gross spreads, for mid-sized IPOs. In carrying out this study, the SEC would be required to (a) compare underwriting fees in foreign countries to those in the United States; (b) analyze the relationship between the costs of taking a company public and the underwriting fees; (c) compare the underwriting fees for larger company IPOs as compared with mid-sized IPOs; and (d) examine the changes to underwriting fees, if any, between 1980 and today. The SEC would be required to consider any disparities between the costs and fees associated with mid-sized IPOs, their influence on a company’s decision to go public and any alternatives to going public through alternatives to the traditional underwriting process (such as direct listing with a securities exchange or by filing a Form 10). Such a study is expected to assist policymakers with the determination of steps to make IPO markets more competitive, and thus benefit issuers and investors. The text of H.R. 6324 can be found here.

5. Fostering Innovation Act of 2017 (H.R. 1645) (Additional Relief from SOX 404(b) Auditor Attestation Requirements for EGCs). Sponsored by Rep. Kyrsten Sinema (D-AZ) and Rep. Trey Hollingsworth (R-IN), this bill would amend Section 404(b) of the Sarbanes-Oxley Act to provide a temporary exemption for certain low-revenue emerging growth companies from the SOX 404(b) auditor attestation requirement, which companies would otherwise lose their exempt status at the end of the five-year EGC period under current law. The temporary exemption is reserved for low-revenue issuers that (a) ceased to be an EGC on the last day of the fiscal year of the issuer following the fifth anniversary of its IPO, (b) had average annual gross revenues below $50,000,000 as of the most recently completed fiscal year, and (c) are not large accelerated filers. The text of H.R. 1645 can be found here.

6. Modernizing Disclosures for Investors Act (H.R. 5970) (Review of Quarterly Reporting Framework). Sponsored by Rep. Ann Wagner (R-MO), this bill would require the SEC to provide Congress with a report containing a cost-benefit analysis of reporting companies’ use of SEC Form 10-Q for quarterly reporting. The bill also directs the SEC to report to Congress with recommendations for decreasing costs, increasing transparency, and increasing efficiency of quarterly financial reporting by reporting companies, and considering the costs and benefits of alternative formats for quarterly reporting. The text of H.R. 5970 can be found here.

7. Promoting Transparent Standards for Corporate Insiders Act (H.R. 6320) (Study of Potential Amendments to Rule 10b5-1). Introduced by Ranking Member Maxine Waters (D-CA), this bill would require the SEC to study whether Rule 10b5-1 should be amended to, among other things: impose additional limitations on the ability of corporate insiders to adopt Rule 10b5-1 trading plans among other things; limit insiders from adopting multiple, overlapping Rule 10b5-1 trading plans; impose a mandatory delay between the adoption of a trading plan and the first trade under the plan; limit the frequency with which issuers and insiders can modify or cancel a plan; require that SEC filings be made with respect to trading plan adoptions, amendments, terminations and transaction; or require boards of issuers to adopt policies covering Rule 10b5-1 trading plan practices. The text of H.R. 6320 can be found here.

8. Enhancing Multi-Class Stock Disclosures Act (H.R. 6322) (Additional Disclosure Requirements for Issuers with a Multi-Class Stock Structure). Sponsored by Rep. Gregory Meeks (D-NY), this bill would amend the Exchange Act to require issuers with multiple classes of stock to make additional disclosures regarding their aggregate influence. As amended, the Exchange Act would require each issuer with a multi-class stock structure (a capitalization structure containing two or more classes of stock that have different amounts of voting power) to disclose in any proxy or consent solicitation material with respect to each officer, director and/or holder of 5% or more of the total combined voting power of the issuer (a) the amount of equity interest directly or indirectly owned by such person (expressed as a percentage of the total value of the issuer’s outstanding equity securities) and (b) the amount of voting power held by such person (expressed as a percentage of the total combined voting power of all classes of the issuer’s securities entitled to vote in the election of directors). The text of H.R. 6322 can be found here.

9. Helping Angels Lead Our Startups (HALOS) Act (H.R. 79) (Exemption from General Solicitation Prohibitions for Presentations to Angel Investors and Certain Other Groups). Sponsored by Rep. Steven Chabot (R-OH) and Rep. Kyrsten Sinema (D-AZ), this bill would provide an exemption from prohibitions on general solicitation for certain presentations to “angel investor groups,” colleges and universities, nonprofit organizations and venture capital associations, provided the issuer adheres to certain conditions of communication. Among other things, permitted communications at such events would not be permitted to include advertising that refers to any specific offering of securities by the issuer, the sponsor would not be permitted to provide investment recommendation or advice to attendees and no specific information regarding a securities offering would be permitted to be communicated by the issuer beyond the type and amount of securities being offered, the amount of securities already subscribed for, and the intended use of proceeds from the offering. The text of H.R. 79 can be found here.

10. Fair Investment Opportunities for Professional Experts Act (H.R. 1585) and Family Office Technical Correction Act of 2017 (H.R. 3972) (Amendments to “Accredited Investor” Definition). Reps. David Schweikert (R-AZ), French Hill (R-AR), Carolyn Maloney (D-NY) and Kyrsten Sinema (D-AZ) sponsored H.R. 1585. H.R. 1585 would amend the definition of “accredited investor” under Regulation D so those who do not have a high income or high net worth but do have the education and job experience to evaluate investment risks and merits would be able to qualify as an accredited investor. This would include natural persons currently licensed or registered as a broker or investment advisor by the SEC, FINRA or an equivalent SRO and natural persons the SEC determines to have demonstrable education or job experience to qualify as having the requisite professional knowledge of a subject related to a particular investment would qualify as accredited investors, respectively. The text of H.R. 1585 can be found here.

Sponsored by Rep. Carolyn Maloney (D-NY), H.R. 3972 would clarify that family offices and family clients, as defined in section 275.202(a)(11)(G)-1 of title 17, Code of Federal Regulations, are accredited investors under Regulation D. The text of H.R. 3972 can be found here.

11. Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2017 (H.R. 477) (Exemption from Exchange Act Registration for Brokers Focused on Smaller, Privately Held Company M&A). Sponsored by Rep. Bill Huizenga (R-MI) and Rep. Brian Higgins (D-NY), this bill would provide an exemption from Exchange Act registration for mergers and acquisition brokers who help transfer the ownership of smaller, privately held companies (privately held companies that meet either or both of (a) earnings before interest, taxes depreciation and amortization less than $25 million or (b) gross revenues below $250 million). This bill also would disqualify “bad actors” from utilizing the simplified process and not allow transactions involving shell companies (other than business combination-related shell companies, such as a SPAC). The text of H.R. 477 can be found here.

12. Expanding Access to Capital for Rural Job Creators Act (H.R. 4281) (Report on Challenges to Rural Area Small Businesses in Accessing Capital). Sponsored by Rep. Ruben Kihuen (D-NV) and Rep. Alex Mooney (R-WV), this bill would require the SEC’s Advocate for Small Business Capital Formation to identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. The text of H.R. 4281 can be found here.

13. Developing and Empowering our Aspiring Leaders (DEAL) Act (H.R. 6177) (Amendments to Investment Advisers Act to Facilitate Follow-on Investments by Venture Capital Firms). Introduced by Rep. Trey Hollingsworth (R-IN), this bill would allow venture capital firms to continue to follow their portfolio companies along their growth path by permitting more follow-on investments without fear of triggering significant regulatory burden. The bill would require the SEC to revise the definitions of a qualifying portfolio company and a qualifying investment to include an EGC and the equity securities of an EGC, respectively, for purposes of the exemption from registration for venture capital fund advisers under the Investment Advisers Act of 1940. The text of H.R. 6177 can be found here.

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