On April 5, 2012, the Jumpstart Our Business Start-ups (JOBS) Act was signed into law by President Barack Obama. The JOBS Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements.
Whether you believe that the JOBS Act met expectations or not, it certainly changed the private capital markets. What is the JOBS Act?
As noted above, Title I of the JOBS Act carves out a new category of filer under the federal securities laws: the “emerging growth company” (EGC). It provides companies an on-ramp to ease their transition from private to public status.
The JOBS Act defines an EGC as having annual gross revenues less than $1.07 billion in its most recently completed fiscal year. It exempts companies that held an initial public offering on or before December 8, 2011.
The securities and exchange act of 1934 required a company with assets over $10 million and 500 or more shareholders to register that class of equity securities.
As noted above, Title V of the JOBS Act increased the registration threshold from 500 shareholders to 2,000 persons or 500 non-accredited investors. However, that excludes persons who receive employee compensation plan securities under a transaction exempt from registration under the 1933 Securities Act. In the case of a bank or bank holding company, Title VI of the JOBS Act increased the registration threshold from 500 shareholders of record to 2,000 persons.
Consequently, a private company may now raise several rounds of capital while at the same time using equity incentives to compensate management and employees without triggering Exchange Act registration requirements or being compelled to go public.
On September 23, 2013, it became permissible for issuers to generally solicit and publicly advertise specific private securities offerings. Those offerings rely on Rule 506 subsection (c) Regulation D under Section 4(a)(2) of the Securities Act. Rule 506 is by far the most popular of all private offering exemptions.
In its original state, Rule 506, retained in subsection (b) of the amended Rule 506, allows an issuer to offer and sell an unlimited amount of securities to
Now, under Rule 506(c), an issuer can offer and sell an unlimited amount of securities. But the issuer can use general solicitation if they take reasonable steps to verify that purchasers are accredited investors. This can potentially transform private capital markets.
It permits an issuer to make a much broader appeal. No longer are issuers limited to reaching out to people with whom they or their intermediaries have pre-existing relationships.
Only a few of the more than ten million accredited investor households in the United States have participated in a private placement. We believe one of the primary reasons was a lack of access. Many accredited investors do not have the kind of pre-existing relationships that would expose them to private investment opportunities. The ban on general solicitation has kept those investors out of the private capital markets.
We believe the JOBS Act has allowed more accredited investors to enter the private capital markets. According to the SEC, as of 2017, money raised through unregistered securities has outpaced amounts raised by registered securities.
For these reasons, Rule 506(c) has made private offerings a viable alternative to registered public offerings for both private and public issuers.
Because equity crowdfunding allows non-accredited investors to invest in the private market, smaller companies that cannot secure investments are more likely to use crowdfunding platforms.
First, the JOBS Act puts limits on an issuer. They may raise a maximum of $1M in any 12 months from exempt offerings if utilizing Title III crowdfunding. Second, there is a limit to the amount of money investors can invest through Title III crowdfunding.
Those with income and net worth below $107,000 are limited to the greater of $2,200 or 5% of their annual income or net worth. Those who meet the $107,000 threshold are limited to the lower of 10% of their annual income or net worth – not to exceed $107,000.
These are significant limitations. For most issuers, $1 million over 12 months is not a great deal of money, especially when raising that $1 million could require taking on hundreds of new investors. In addition to the potential for corporate governance and investor relations difficulties, a Title III crowdfunding offering may limit issuers’ future capital-raising prospects.
The JOBS Act marks a transformative period for the private capital markets, as it has made changes to the landscape of federal securities laws. While you may associate the JOBS Act with start-ups, or even just crowdfunding, we hope you recognize that many of the provisions of the JOBS Act are universal. They can benefit all manner of issuers.
[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on October 19, 2013, and previously updated on November 6, 2019. It has been recently edited by Kateri Halbleib.]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Vanessa J. Schoenthaler focuses her practice on corporate and securities matters with an emphasis on private and public securities transactions, compliance and disclosure obligations and corporate governance matters. Her clients rely on her deep experience navigating the complexities of both the public and private securities regulatory environment. She frequently contributes to publications such as IR…
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