Key Provisions of the JOBS Act

by Tracey Solomon | April 23, 2012

On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which aims to assist smaller companies entering public capital markets. The JOBS Act intends to do so by decreasing regulatory procedures, thereby allowing smaller businesses to enter capital markets more quickly. So what does the JOBS Act mean for you? Understanding the key provisions of the JOBS Act will help you determine how it may impact your business or your future investing choices.

The JOBS Act intends to stimulate economic growth by: a) easing the process of an initial public offering (IPO) for emerging growth companies (generally defined as companies that earn $1 billion or less in annual revenues) and reducing their regulatory burden, b) providing exemptions from the requirement to register public offerings with the U.S. Security and Exchange Commission (SEC) for certain types of small offerings (subject to several conditions) and c) allowing private companies with relatively large groups of shareholders to delay becoming a public reporting company.

The provisions of the JOBS Act relax the requirements of the federal securities law pertaining to public offerings and public companies for emerging growth companies in various ways and modify the Sarbanes-Oxley Act of 2002. As a result, these companies may:

  • prepare an IPO registration statement with two years of audited financial statements (reduced from the current three-year requirement);
  • omit selected financial data for periods preceding the earliest audited financial statements;
  • qualify for exemptions from various key disclosure and internal control audit requirements, primarily added by the Sarbanes-Oxley Act of 2002 (Note: it does not alleviate senior management’s responsibility to maintain its accounting systems to the same standards introduced by Sarbanes-Oxley);
  • implement new accounting standards using the same time frame as private companies;
  • submit an IPO registration statement for the SEC staff to review on a confidential basis;
  • engage in oral or written communications with institutional accredited investors and qualified institutional buyers to gauge interest in an IPO before a registration statement is filed without being subject to existing pre-offering communication restrictions;
  • increase the offering threshold for small issues from $5 million to $50 million.

Although the above provisions relax the requirements of the federal securities law, the JOBS Act also adds a civil liability provision for false or misleading statements or omissions set forth in communications. The JOBS Act also mandates the SEC to require small issuers to file audited financial statements with the SEC annually.

The JOBS Act includes provisions that will also benefit companies that are not considered emerging growth companies by loosening regulations surrounding capital funding and shareholder limitations. Specifically, the JOBS Act:

  • allows ‘”crowdfunding”, a strategy to increase access to capital markets, and permits non-reporting issuers to raise up to $1 million through online solicitations, with certain limits on allowable investments per investor;
  • increases the shareholder SEC registration minimum from 500 to 2,000 shareholders–meaning that companies do not have to register with the SEC until they acquire 2,000 investors, whereas previous legislation has required registration after acquiring 500 investors;
  • increases bank (or bank holding company) SEC registration minimum to $10 billion and at least 2,000 investors, a substantial increase from the prior limit of 500 shareholders.

Whether you are a business owner seeking capital or an investor looking to expand your portfolio, it is important to educate yourself on the details of this new law and how it affects you or your business. As with any potential business endeavor or investment opportunity, it is important to be cognizant of the additional risks that may be involved.

Companies need to remember that although the JOBS Act relaxes some regulations, it does not alleviate the responsibility of management to maintain good records or implement and assess internal controls over financial reporting. Being proactive and commissioning financial reports from certified public accountants can help to identify areas for improvement, gain better understanding of internal controls and assist with the requirements of capital funding. Additionally, keeping sound internal and external accounting records will help ensure that potential investors feel confident investing in your company.

As an investor, reach out to a trusted financial advisor to give you expert advice about investing in start-up companies seeking to go public. Financial experts can analyze company profiles and provide you with financial summaries so that you are making the most informed decision prior to investing. It is also important for you to ask questions when working with a financial advisor so you understand their due diligence process before recommending an investment. Keep in mind that with greater access to emerging markets, it is more important than ever to work with your financial advisor to understand all the risks and benefits that potential investments offer.

If you have any questions regarding the JOBS Act and how to protect your business, please contact me at (805) 963-7811 or tsolomon@bpw.com.