On April 5, 2012, President Obama enacted the Jumpstart Our Business Startups (JOBS) Act. The purpose of the Act is to lighten the regulatory burdens faced by smaller companies and to expand those business’ opportunities to raise capital. Previously, the SEC’s lengthy and cumbersome registration rules turned many businesses off from raising capital through securities offerings. The JOBS Act will amend and supplement Federal securities laws in an effort to update regulations to match the realities of modern day business capitalization. Many entrepreneurs praise the JOBS Act for giving companies access to new capital raising apparatuses.
Publicity for the JOBS Act has focused on the benefits it will have for startup companies, but there are many provisions that should be advantageous to any company seeking new methods of raising capital. It must be noted, however, that many provisions of the JOBS Act require the SEC to draft and implement new regulations, so the full breadth and scope of the JOBS Act remains to be seen.
There are three specific provisions of the JOBS Act that companies should pay close attention to as the implementation process begins: (i) the revisions to Rule 506 of Regulation D of the Securities Act, (ii) the expansion of exemptions under Regulation A of the Securities Act, and (iii) the allowance for “crowdfunding” under Section 4 of the Securities Act. This article will provide a brief overview of these revisions will change SEC registration.
Rule 506 of Regulation D
Under the Securities Act, any offer to sell securities must be registered with the SEC. Registration is oftentimes lengthy and expensive. Currently, Regulation D exempts certain companies from registration, provided that company meets very specific requirements that generally limit capital raising avenues. Among these requirements is a restriction on general solicitation and advertising, which meant that companies could only makes offers to accredited investors with which they already had a business relationship.
The JOBS Act lifts this restriction and allows for the general solicitation and advertisement of an offering made under Rule 506 so long as the final purchaser (not the offeree) is an accredited investor. This revision could allow companies to market Rule 506 offerings using advertising vehicles such as newspapers or the Internet. No longer will Regulation D require issuers to have some pre-existing relationship in order to make Rule 506 offerings. This will give companies the chance to attract investors that were previously unreachable under the older regulations.
The SEC has 90 days after the enactment of the JOBS Act to amend Rule 506 of Regulation D. Therefore, the exact language of the new rules will be available by July 4, 2012.
Section 3(b) of the Securities Act allows the SEC to exempt certain securities offerings from registration. Pursuant to Section 3(b), the SEC created Regulation A to allow for securities offerings of up to $5 million without triggering the requirement of full registration with the SEC. While Regulation A may sound appealing in theory, many companies find it burdensome in practice due to its relatively low offering ceiling of $5 million and the fact that these securities do not qualify as “covered securities” and are therefore subject to state blue sky laws. The JOBS Act amends Regulation A in an effort to broaden its appeal. The amended Regulation A has been commonly referred to as “Regulation A+”.
Regulation A+ contains several elements that make it much more appealing than its predecessor. First, it raises the offering ceiling from $5 million to $50 million. Second, Regulation A securities will now be “covered securities,” no longer subject to state blue sky laws. And finally, Regulation A securities may now be promoted through general solicitation and advertisement, similar to the new Regulation D securities. These new elements of Regulation A+ should allow companies to make relatively small securities offerings without triggering the full weight of SEC registration. No timeline has been set for the SEC’s implementation of this new Regulation A+, so businesses should keep an eye out for the progression of this revision.
Crowdfunding is a capital raising method in which many small investors (the crowd) make relatively small investments in a company. The SEC has no provision specifically addressing crowdfunding. It is illegal under the current SEC rules unless the company registers with the SEC or meets a registration exemption. Title III of the JOBS Act carves out a brand new exemption for crowdfunding, creating the possibility for companies to generate capital by utilizing the Internet and social media to attract investors and raise capital. Crowdfunding is appealing to both the company and the investor. The company has access to larger recourses of capital while the investor can limit his or her own risk by only contributing a relatively small investment.
Under the new Section 4(6) of the Securities Act as amended by the JOBS Act, crowdfunding is allowed so long as certain requirements are met. These requirements include the total amount being sold by the issuer must not exceed $1 million during the preceding 12 months, and the transaction must be conducted through a broker or funding portal. Crowdfunding offers an exciting way for both investors and companies to seek out business opportunities
How the SEC will put crowdfunding into place remains to be seen. The JOBS Act provides the SEC with 270 days after the Act’s enactment to issue these new rules, and even then investors and companies must wait for these new SEC rules to be adopted.
Neverthless, crowdfunding, as well as the amendments to Regulation D and Regulation A, should substantially change the way small businesses raise capital. Time will tell the full effect of the JOBS Act as its provisions are slowly incorporated in securities law. If you would like more information about the JOBS Act, or other legal issues, please contact a member of our Business Group or call 208.344.6000.