I.
Recent landmark piece of US securities law legislation, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, billed as an “Act…to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies,” lessens, in many respects, the regulatory burdens in IPOs and “emerging growth companies’” access to the U.S. capital markets.
The term “emerging growth company” is defined as a company that has total annual gross revenues of less than $1 billion, inflation indexed, during its most recently completed fiscal year. And, “An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of—(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation…) or more; (B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under this title; (C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which such issuer is deemed to be a ‘large accelerated filer’, as defined in section 240.12b－2 of title 17, Code of Federal Regulations, or any successor thereto.’’ This definition of “emerging growth company” practically covers the vast majority of pre-IPO companies.
To revitalize IPOs, JOBS Act allows confidential review by SEC staff of draft registration statements prior to making the registration statement public, avoiding premature disclosure of privately held company information. Other provisions of the JOBS Act rewrite some important parts of U.S. federal securities laws and regulations on applicable IPOs, as follows:
1. The JOBS Act now allows underwriters in IPOs to prepare research reports before and following the offering, before providing the prospectus. Section 105 (“Availability of Information about Emerging Growth Companies”) amends Section 2(a)(3) of the Securities Act of 1933 (15 U.S.C. 77b(a)(3)) by adding at the end the following: ‘‘The publication or distribution by a broker or dealer of a research report about an emerging growth company that is the subject of a proposed public offering of the common equity securities of such emerging growth company pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective shall be deemed for purposes of paragraph (10) of this subsection and section 5(c) not to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering of the securities of the issuer. As used in this paragraph, the term ‘research report’ means a written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.’’ And, regarding securities analyst communications, Sub-section (b) inserted the following limitation to Section 15D of the Securities Exchange Act of 1934 (15 U.S.C. 78o－6): “…neither the [SEC] nor any national securities association []may adopt or maintain any rule or regulation in connection with an initial public offering of the common equity of an emerging growth company— (1) restricting, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securities analyst and a potential investor; or (2) restricting a securities analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as a securities analyst.’’
2. Title I enables emerging growth companies to use “test-the-waters” communications with QIBs and institutional accredited investors and liberalizes the use of research reports on emerging growth companies. And, the JOBS Act eliminates firewalls prevent analysts communication out of concern that the restrictions have limited research on IPO companies because of limited analyst access, constraining investor interest. Sub-section 105(c) (“Expanding Permissible Communications”) amends Section 5 of the Securities Act of 1933 (15 U.S.C. 77e) by inserting the following limitation: “…an emerging growth company or any person authorized to act on behalf of an emerging growth company may engage in oral or written communications with potential investors that are qualified institutional buyers [QIBs] or institutions that are accredited investors… to determine whether such investors might have an interest in a contemplated securities offering, either prior to or following the date of filing of a registration statement with respect to such securities with the Commission, subject to the requirement of subsection (b)(2).’’ On post －offering communication, with respect to the securities of an emerging growth company, neither [the SEC] nor any national securities association [] may adopt or maintain any rule or regulation prohibiting any broker, dealer, or member of a national securities association from publishing or distributing any research report or making a public appearance, “either—(1) within any prescribed period of time following the [IPO] date of the emerging growth company; or (2) within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the initial public offering date.
3. Title I of the JOBS Act provides scaled disclosure provisions for emerging growth companies, including, among other things, two years (instead of five years as previously required) of audited financial statements in the Securities Act registration statement for an initial public offering (IPO) of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting.
4. It further allows extended compliance periods for new accounting standards issued by the accounting industry’s standard-setting Board from time to time, by allowing emerging growth companies to follow the private company deadline rather than the usually earlier deadline for public companies.
5. Subsection 102(a)(3) of the JOBS Act amends “Section 953(b)(1) of the Investor Protection and Securities Reform Act of 2010 (Public Law 111－203; 124 Stat. 1904) and reduced the requirements as it relates to executive compensation disclosure, and shareholders’ “say-on-pay” votes under Dodd-Frank.
II.
The JOBS Act raised threshold of registration as reporting companies to 2,000 shareholders of record, therefore created a class of companies potentially vulnerable to unreported shareholders’ acquiring controlling voting blocs without Schedule 13D disclosure, or via a shadow proxy contest. JOBS Act §501 amended §12(g)(1)(A) of the Securities Exchange Act of 1934 to require “a class of equity securities…held of record by either—(i) 2,000 persons, or (ii) 500 persons who are not accredited investors.” Proxy rules and disclosure requirements on tender offers, including §14(d) of Williams Act, might not apply to non-reporting issuers.
The JOBS Act also provides following exemption from registration, creating new options for companies to raise capital: (1) it can make a private placement using a general solicitation, provided that it only sells to “accredited investors” [ JOBS Act §201, amending SEC Rule 506 and 144A]; (2) it can make a Regulation A offering of up to $50 million, up from the prior $5 million ceiling, in any 12 month period [JOBS Act §401, amending §3(b) of the Securities Act of 1933]; or (3) it can make a “crowdfunding” offering to retail investors under new §4(6) of the Securities Act of 1933 [JOBS Act §302, adding new §4(6) of the Securities Act of 1933]. The following Note focuses on changes on employment of general solicitation in private placement and amended Regulation A offering.
First, JOBS Act §201 (“Modification of Exemption”) instructs the SEC to: (1) revise its rules to eliminate “the prohibition against general solicitation or general advertising contained in” Rule 502(c) of Regulation D to the extent that it applied to offers and sales of securities to “accredited investors,” and (2) revise Rule 144A(d)(1) to provide that securities sold under that exemption “may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer.” However, the SEC missed its “90 days after date of enactment” deadline in rule-making in this connection, having not used its authority under §201(a)(1) to “require the issuer to take reasonable steps to verify that the purchasers of the securities are accredited investors.” The words “reasonable steps,” of course, could mean more than self-certification.
And, §201 also exempts persons who might be otherwise qualified as “brokers” or “dealers.” Specifically, §201(c) exempts both (1) persons who “maintain[] a platform or mechanism that permits the offer, sale, purchase or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issues of such securities, whether online, in person, or through any other means;” and (2) persons “associated with [them]” co-investing or providing “ancillary services” to them, from the definition of broker or dealer for purposes of §15(a)(1) of the Securities Exchange Act of 1934. As a limitation of this sweeping broker-dealer exemption, however, subsection (2) requires that (A) such person and each person associated “receives no compensation in connection with the purchase or sale of such security,” and, (B) such person “does not have possession of customer funds or securities in connection with the purchase or sale of such security.” Again, SEC rulemaking is not yet complete.
Secondly, Regulation A is dramatically revised. JOBS Act §401 increased the 12-month exemption for small offerings under Securities Act §3(b) from $5 million to $50 million. Same as §4(6) (“CROWDFUNDING EXEMPTION”), this new class of Regulation A securities can be offered and sold to public and retail investors based on certain required disclosure, but, unlike §4(6), the securities so issued are not “restricted securities[]” and may be resold immediately. See, JOBS Act §401 (“(2) Additional Issues. -The Commission shall by rule or regulation add a class of securities to the securities exempted pursuant to this section in accordance with the following terms and conditions: (A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption added in accordance with this paragraph shall not exceed $50,000,000. (B) The securities may be offered and sold publicly. (C) The securities shall not be restricted securities within the meaning of the Federal securities laws and the regulations promulgated thereunder. (D) The civil liability provision in section 12(a)(2) shall apply to any person offering or selling such securities. (E) The issuer may solicit interest in the offering prior to filing any offering statement, on such terms and conditions as the Commission may prescribe in the public interest or for the protection of investors. (F) The Commission shall require the issuer to file audited financial statements with the Commission annually. (G) Such other terms, conditions, or requirements as the Commission may determine necessary in the public interest and for the protection of investors, […]” Coupled with the new ceiling, namely, $50 million, as compared with the $1 million aggregate ceiling on §4(6) (plus the limitation in §4(6) on sales to individual investors to a low percentage of their annual income or net worth), §3(b) was legislated to revamp Regulation A offerings and re-start small issuers’ access to public capital and IPO markets.
All Rights Reserved.
Copy is prohibited without written consent from Frank Xu LLP.
------------------------
FRANK XU LLP
富睿国际律师事务所
40 Wall Street, Suite 3301
New York, NY 10005
Tel: 1(212)-488-2580
Fax: 1(212)-901-0499
Website: www.frankxulaw.com
Recent landmark piece of US securities law legislation, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, billed as an “Act…to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies,” lessens, in many respects, the regulatory burdens in IPOs and “emerging growth companies’” access to the U.S. capital markets.
The term “emerging growth company” is defined as a company that has total annual gross revenues of less than $1 billion, inflation indexed, during its most recently completed fiscal year. And, “An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of—(A) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,000,000,000 (as such amount is indexed for inflation…) or more; (B) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under this title; (C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which such issuer is deemed to be a ‘large accelerated filer’, as defined in section 240.12b－2 of title 17, Code of Federal Regulations, or any successor thereto.’’ This definition of “emerging growth company” practically covers the vast majority of pre-IPO companies.
To revitalize IPOs, JOBS Act allows confidential review by SEC staff of draft registration statements prior to making the registration statement public, avoiding premature disclosure of privately held company information. Other provisions of the JOBS Act rewrite some important parts of U.S. federal securities laws and regulations on applicable IPOs, as follows:
1. The JOBS Act now allows underwriters in IPOs to prepare research reports before and following the offering, before providing the prospectus. Section 105 (“Availability of Information about Emerging Growth Companies”) amends Section 2(a)(3) of the Securities Act of 1933 (15 U.S.C. 77b(a)(3)) by adding at the end the following: ‘‘The publication or distribution by a broker or dealer of a research report about an emerging growth company that is the subject of a proposed public offering of the common equity securities of such emerging growth company pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective shall be deemed for purposes of paragraph (10) of this subsection and section 5(c) not to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering of the securities of the issuer. As used in this paragraph, the term ‘research report’ means a written, electronic, or oral communication that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.’’ And, regarding securities analyst communications, Sub-section (b) inserted the following limitation to Section 15D of the Securities Exchange Act of 1934 (15 U.S.C. 78o－6): “…neither the [SEC] nor any national securities association []may adopt or maintain any rule or regulation in connection with an initial public offering of the common equity of an emerging growth company— (1) restricting, based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securities analyst and a potential investor; or (2) restricting a securities analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as a securities analyst.’’
2. Title I enables emerging growth companies to use “test-the-waters” communications with QIBs and institutional accredited investors and liberalizes the use of research reports on emerging growth companies. And, the JOBS Act eliminates firewalls prevent analysts communication out of concern that the restrictions have limited research on IPO companies because of limited analyst access, constraining investor interest. Sub-section 105(c) (“Expanding Permissible Communications”) amends Section 5 of the Securities Act of 1933 (15 U.S.C. 77e) by inserting the following limitation: “…an emerging growth company or any person authorized to act on behalf of an emerging growth company may engage in oral or written communications with potential investors that are qualified institutional buyers [QIBs] or institutions that are accredited investors… to determine whether such investors might have an interest in a contemplated securities offering, either prior to or following the date of filing of a registration statement with respect to such securities with the Commission, subject to the requirement of subsection (b)(2).’’ On post －offering communication, with respect to the securities of an emerging growth company, neither [the SEC] nor any national securities association [] may adopt or maintain any rule or regulation prohibiting any broker, dealer, or member of a national securities association from publishing or distributing any research report or making a public appearance, “either—(1) within any prescribed period of time following the [IPO] date of the emerging growth company; or (2) within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the initial public offering date.
3. Title I of the JOBS Act provides scaled disclosure provisions for emerging growth companies, including, among other things, two years (instead of five years as previously required) of audited financial statements in the Securities Act registration statement for an initial public offering (IPO) of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting.
4. It further allows extended compliance periods for new accounting standards issued by the accounting industry’s standard-setting Board from time to time, by allowing emerging growth companies to follow the private company deadline rather than the usually earlier deadline for public companies.
5. Subsection 102(a)(3) of the JOBS Act amends “Section 953(b)(1) of the Investor Protection and Securities Reform Act of 2010 (Public Law 111－203; 124 Stat. 1904) and reduced the requirements as it relates to executive compensation disclosure, and shareholders’ “say-on-pay” votes under Dodd-Frank.
II.
The JOBS Act raised threshold of registration as reporting companies to 2,000 shareholders of record, therefore created a class of companies potentially vulnerable to unreported shareholders’ acquiring controlling voting blocs without Schedule 13D disclosure, or via a shadow proxy contest. JOBS Act §501 amended §12(g)(1)(A) of the Securities Exchange Act of 1934 to require “a class of equity securities…held of record by either—(i) 2,000 persons, or (ii) 500 persons who are not accredited investors.” Proxy rules and disclosure requirements on tender offers, including §14(d) of Williams Act, might not apply to non-reporting issuers.
The JOBS Act also provides following exemption from registration, creating new options for companies to raise capital: (1) it can make a private placement using a general solicitation, provided that it only sells to “accredited investors” [ JOBS Act §201, amending SEC Rule 506 and 144A]; (2) it can make a Regulation A offering of up to $50 million, up from the prior $5 million ceiling, in any 12 month period [JOBS Act §401, amending §3(b) of the Securities Act of 1933]; or (3) it can make a “crowdfunding” offering to retail investors under new §4(6) of the Securities Act of 1933 [JOBS Act §302, adding new §4(6) of the Securities Act of 1933]. The following Note focuses on changes on employment of general solicitation in private placement and amended Regulation A offering.
First, JOBS Act §201 (“Modification of Exemption”) instructs the SEC to: (1) revise its rules to eliminate “the prohibition against general solicitation or general advertising contained in” Rule 502(c) of Regulation D to the extent that it applied to offers and sales of securities to “accredited investors,” and (2) revise Rule 144A(d)(1) to provide that securities sold under that exemption “may be offered to persons other than qualified institutional buyers, including by means of general solicitation or general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a qualified institutional buyer.” However, the SEC missed its “90 days after date of enactment” deadline in rule-making in this connection, having not used its authority under §201(a)(1) to “require the issuer to take reasonable steps to verify that the purchasers of the securities are accredited investors.” The words “reasonable steps,” of course, could mean more than self-certification.
And, §201 also exempts persons who might be otherwise qualified as “brokers” or “dealers.” Specifically, §201(c) exempts both (1) persons who “maintain[] a platform or mechanism that permits the offer, sale, purchase or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issues of such securities, whether online, in person, or through any other means;” and (2) persons “associated with [them]” co-investing or providing “ancillary services” to them, from the definition of broker or dealer for purposes of §15(a)(1) of the Securities Exchange Act of 1934. As a limitation of this sweeping broker-dealer exemption, however, subsection (2) requires that (A) such person and each person associated “receives no compensation in connection with the purchase or sale of such security,” and, (B) such person “does not have possession of customer funds or securities in connection with the purchase or sale of such security.” Again, SEC rulemaking is not yet complete.
Secondly, Regulation A is dramatically revised. JOBS Act §401 increased the 12-month exemption for small offerings under Securities Act §3(b) from $5 million to $50 million. Same as §4(6) (“CROWDFUNDING EXEMPTION”), this new class of Regulation A securities can be offered and sold to public and retail investors based on certain required disclosure, but, unlike §4(6), the securities so issued are not “restricted securities[]” and may be resold immediately. See, JOBS Act §401 (“(2) Additional Issues. -The Commission shall by rule or regulation add a class of securities to the securities exempted pursuant to this section in accordance with the following terms and conditions: (A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption added in accordance with this paragraph shall not exceed $50,000,000. (B) The securities may be offered and sold publicly. (C) The securities shall not be restricted securities within the meaning of the Federal securities laws and the regulations promulgated thereunder. (D) The civil liability provision in section 12(a)(2) shall apply to any person offering or selling such securities. (E) The issuer may solicit interest in the offering prior to filing any offering statement, on such terms and conditions as the Commission may prescribe in the public interest or for the protection of investors. (F) The Commission shall require the issuer to file audited financial statements with the Commission annually. (G) Such other terms, conditions, or requirements as the Commission may determine necessary in the public interest and for the protection of investors, […]” Coupled with the new ceiling, namely, $50 million, as compared with the $1 million aggregate ceiling on §4(6) (plus the limitation in §4(6) on sales to individual investors to a low percentage of their annual income or net worth), §3(b) was legislated to revamp Regulation A offerings and re-start small issuers’ access to public capital and IPO markets.
All Rights Reserved.
Copy is prohibited without written consent from Frank Xu LLP.
------------------------
FRANK XU LLP
富睿国际律师事务所
40 Wall Street, Suite 3301
New York, NY 10005
Tel: 1(212)-488-2580
Fax: 1(212)-901-0499
Website: www.frankxulaw.com
