The SEC missed its first rulemaking deadline related to the Jumpstart Our Business Startups (JOBS) Act, passed in April 2012. While some portions of the law were effective immediately, others, such as the ability for companies to advertise the sale of stock, require new rules to be written by regulatory authorities.
“We want to create something that is workable and usable, that is absolutely our goal,” stated SEC Chairman Mary Schapiro, speaking at a House of Representatives hearing on June 28. “But it is a bit more challenging a rulemaking than it might seem on the surface.”
Despite the setback, the JOBS Act brings numerous benefits to the small-cap market.
One benefit is a modification to Section 12(g) of the Securities Exchange Act. Previously, companies were compelled to register securities with the SEC and file periodic reports if they had at least $1 million in assets and 500 shareholders of record at the end of a fiscal year. Under the JOBS Act, these thresholds have been increased to $10 million in assets and 2,000 shareholders of record. Now companies can stay private longer and wait for a more opportune time to enter the public markets.
Another benefit is what some are calling “Regulation A+,” an amendment to Section 3(b) of the Securities Act of 1933. This change exempts from registration any class of equity, debt or convertible debt securities sold in an offering where the aggregate offering amount does not exceed $50 million in any 12-month period. An issuer using Regulation A+ must file audited financial statements each year following the offering and will have to comply with any other rules that may be developed by the SEC.
The JOBS Act also provides emerging growth companies exemptions from several aspects of the Sarbanes-Oxley Act of 2002, including Section 103(a)(3) and Section 404(b). Additionally, emerging growth companies are also exempt from Section 951 and Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This new flexibility provided by the JOBS Act makes it easier for emerging growth companies to access the public markets and allows them to do so when they believe their offering is most likely to succeed.
The crowdfunding provision has been one of the most talked about aspects of the JOBS Act amongst smaller investors. This provision, which is on track for its December 31 implementation, allows companies to raise up to $1 million in a 12-month period from anyone, not just accredited investors. That said, while some hurdles are removed for these smaller fundings, it’s likely that the final rules will be more complicated and expensive than many investors realize.
Bottom line, the JOBS Act, while still a work in progress, will result in many new options of capital formation for emerging growth companies.