What is the JOBS Act?
Enacted into law by President Obama on April 5 2012, the
Jumpstart Our Business Startups (JOBS) Act is US
legislation that instructs the Securities and Exchange
Commission (SEC) to assist small businesses with capital
Primarily the act was intended to make it easier for
companies to go public, by reducing a number of disclosures and
requirements that had been considered a hindrance to the
"The overall goal of the JOBS Act is to pursue capital
formation and in particular help with initial public offerings
(IPOs)," said Ilir Mujalovic, partner at Shearman &
Sterling. "Historically, when compared to today and even
subsequent to the passage of the JOBS Act, IPO levels was at a
much higher level, especially in the 1990s."
Last year 159 companies went public globally, but in 1996
that number was 624, in 1997 488, and in 1999, around 500.
The Act is broken into six parts or titles, each addressing
a different issue.
Emerging Growth Companies (Title I)
The first section of the act defined rules for emerging
growth companies (EGCs): issuers with total annual gross
revenues of less than $1 billion.
Title 1 included a dramatic reform of the communications
the Securities Act. The restrictions were made to allow
companies to communicate with institutional investors and
essentially make offers, provided they were only talking to
institutional investors to offer their securities in advance of
filing registration statements: a dramatic change to
pre-existing law. This provision is known
as testing the waters.
"Under prior law, the communications restrictions posed an
unnecessary challenge for companies. That was an impediment to
private companies considering whether to go public," said Joel
Trotter, partner at Latham & Watkins, who served on the IPO
Task Force and drafted the Title I provisions. "If a company
can't have offering-related conversations with prospective
investors, then it is less able to determine the viability of
an offering until after a registration statement is filed."
"But preparing the registration statement requires an
up-front commitment of significant resources for management and
a team of professional advisors to prepare the disclosure and
file it with the SEC," he added.
This provision was extended last year to include companies
that were not classified as EGCs. More on that
For instance, EGCs under the Jobs Act only had to provide
two years of financial statements rather than three.
This is helpful because companies don't need to engage
auditors to review the third year.
Access to Capital for Job Creators (Title II)
Title II relates to private placements and, specifically, to
relaxing the prohibition that has always existed against
general solicitation, in the context of what was considered
private offerings. Historically, under regulation D, an issuer
looking to make a private placement could not generally
solicit. part of the impetus behind that
Section 201(a) of the JOBS Act requires the SEC to
eliminate the prohibition on using general solicitation under
Rule 506 where all purchasers of the securities are accredited
investors and the issuer takes reasonable steps to verify that
the purchasers are accredited investors.
"In this age of social media and enhanced communications, it
was anachronistic to prevent companies from general
solicitation," said Anna Pinedo, partner at Mayer Brown
Crowdfunding (Title III)
Title three provided a statutory exemption under Securities
Act Section 4(a)(6) from registration for certain crowdfunding
transactions. The idea was that companies, particularly
startups and small companies, would be able to raise small
amounts of money from individuals using the internet or
internet-based funding platforms like Kickstarter.
Casper IPO shows WeWork effect on
"It took a number of years for the SEC to finally adopt
regulations in order to implement the mandate in Title III,
adopting rules for crowdfunding that contained all of the
requirements from an information perspective and otherwise to
provide for this safe harbor," said Pinedo.
Regulation A (Title IV)
Title IV is the last exemption created by the JOBS Act
entitled for create a requirement on the part of the SEC to
either modernise or amend the existing regulation A. Regulation
A is an exemption from the public offering register
requirements for smaller offerings. The JOBS Act expanded
regulation A into two tiers: Tier 1, for securities offerings
of up to $20 million in a 12-month period; and Tier 2, for
securities offerings of up to $50 million in a 12-month
By filing with the SEC and offering circular, the SEC
reviews the application and offers comments just as it would in
response to an IPO prospectus or registration statement.
Global IPO markets in 2020: what to expect
Exchange Act Registration and Deregistration (Titles
Title V and VI should be read together. They modify Section
12(g) of the Securities Exchange Act threshold. When companies
get to a certain size, with certain revenues and a certain
number of holders of record, they default into being reporting
As a result of the statutory changes, an issuer that is
not a bank, bank holding company or savings and loan holding
company is required to register a class of equity securities
under the Exchange Act if:
- it has more than $10 million of total assets;
- the securities are "held of record" by either 2,000
persons, or 500 persons who are not accredited
An issuer that is a bank, bank holding company or
savings and loan holding company is required to register a
class of equity securities if:
- it has more than $10 million of total assets;
- the securities are "held of record" by 2,000 or more
"In order to allow companies to stay private longer the two
titles, title five with respect to regular companies and title
six with respect to banks and savings and loan companies,
modified the 12(g) threshold to make it easier for companies to
remain private and non-reporting longer," said Pinedo.
How successful has it been?
Since implementation of the JOBS Act the
SEC has said repeatedly that it continues to encourage
capital formation, while at the same time protecting
"If the IPO process or public company status is unduly
inhospitable, and particularly if the IPO process is
undesirable relative to an M&A process, you encourage
M&A over listing – which is something of a
distortion, and what Title I of the Act was trying to correct,"
However, looking at the number of IPOs in recent years
compared to the late 1990s tells a story. One reason for that
is because there is so much dry powder in venture capital,
private equity and hedge funds. Because interest rates are low
money is still cheap; far cheaper than it was in the 1990s,
when going public was more appealing.
Companies can simply decide, given the recent strength of
private capital markets, to stay private longer. This may allow
them to continue to focus on their core business without the
significant time and financial effort involved with the going
public process, said Mujalovic. "If you can get access to
capital in the private markets, you can decide to delay the IPO
process as much as you can and pick the opportune time to
launch the offering."
However, many companies do not have this flexibility or
prefer to have a broad investor base as well as research
coverage from investment banks and therefore pursue an IPO even
if they have access to private capital.
Clarifications made as SEC extends
This means that no matter how much more convenient the JOBS
Act has made the IPO process, fewer and fewer companies will
choose that route for early financing.
That said, it has been effective in doing what it set out to
do: make the process easier for the small companies that do
choose this route.
Has it been updated?
In the summer of 2018, a package bill known as the JOBS and
Investor Confidence Act of 2018, referred to as the JOBS Act
3.0, passed the House of Representatives.
When first passed some were concerned that its contents
included ideological contradictions, given that a large number
of its suggestions were already in effect across the US capital
The intention of the updated legislation is to promote
entrepreneurship by bolstering business startups and IPOs.
The act, comprised of 32 separate bills, was largely
welcomed. It is thought that much of its contents will help to
reinvigorate the IPO market for small businesses.
"Normally the reason to package bills together is
because certain targeted senators may not like certain
aspects," says Jeffrey Cohen, partner at Linklaters.
"It’s the legislative approach to 'a spoonful of
sugar helps the medicine go down’."
The bill has yet to pass the Senate.
JOBS Act 3.0 bundle not the answer for SME