PRIMER: the JOBS Act
IFLR's explainer series looks at the Obama era set of rules and regulations that sought to reinvigorate the US equities markets
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 formation.
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 process.
"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."
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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 restrictions in 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 here.
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.
"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 period.
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.
Exchange Act Registration and Deregistration (Titles V–VI)
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 companies.
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; and
the securities are “held of record” by either 2,000 persons, or 500 persons who are not accredited investors.
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; and
the securities are “held of record” by 2,000 or more persons
"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 investors.
"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," said Trotter.
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.
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 markets.
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.