Jobs Act: The SEC Releases Q&A Guidance

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012, a qualified business will be able to raise cash without meeting all the usual SEC requirements for initial public offerings.

While the new law makes it easier for a qualified business to attract investors, the process is not as simple as you might think. It will still take time and resources in order to qualify for “emerging growth company” status and take advantage of crowdfunding.

Before jumping in, business owners should ask questions including:

• Is it better to borrow money from traditional sources, rather than raise it from investors? Bringing in investors means giving up some control and debt financing may cost less in the long run.
• Will you be able to comply with the requirements involved in crowdfunding, including complying with state laws that govern companies with shareholders?
• Will revealing your plans and business details on the Internet lead to a loss of trade secrets?

New Q&A Guidance

Basics of the Jobs Act The new legislation combines several recent proposals affecting the laws and regulations of the Securities & Exchange Commission (SEC) as well as modifying the Sarbanes-Oxley Act of 2002 (SOX). Here’s a quick recap of the main provisions in the JOBS Act: Effective immediately, a privately-owned company with under $1 billion in revenue can raise up to $50 million without registering with the SEC. Previously, the limit was only $5 million. If a company qualifies, it is exempt from the usual requirement of having to conduct independent audits of internal controls for up to five years. The new law allows a qualified business to use crowdfunding to attract cash from investors. Crowdfunding has generally been restricted to artists and business owners who accepted small donations in exchange for items like tote bags and CDs. Typically, the business describes its venture and solicits the funds through a website or online portal. Under the new law, investments are limited to the lesser of $10,000 or 10 percent of the income of an investor earning less than $100,000 a year. The SEC has been granted 270 days to provide regulations on offering company equity through crowdfunding platforms. A company can have up to 2,000 shareholders or 500 unaccredited investors without registering with the SEC. Prior to the new law, the number of shareholders was limited to 500. For this purpose, an “accredited investor” is defined as someone who has a net worth of more than $1 million (not counting a primary residence), has earnings of at least $300,000 ($200,000 for single filers) for the last two years, or is a general partner, director or executive officer of the company. If a company with total assets of more than $10 million exceeds the shareholder cap, it must then register with the SEC within 120 days.

In a series of questions and answers, the SEC’s Division of Corporation Finance recently provided guidance on the implementation and application of the law, in light of existing rules, regulations and procedures.

The SEC notes that the Q&As are not rules, regulations or statements of the Commission.  They address questions of general applicability under Title I of the JOBS Act, which provides scaled disclosure provisions for “emerging growth companies.” These provisions include, among other things, two years of audited financial statements in the Securities Actregistration statement for an initial public offering 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.

Title I also enables emerging growth companies to use test-the-waters communications with qualified institutional buyers and institutional accredited investors and liberalizes the use of research reports on emerging growth companies.

Here are just a few Q&As, edited for length and clarity.

  Question: How can an issuer determine whether or not it meets the revenue test for an “emerging growth company”?

  Answer: An “emerging growth company” is defined in the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year.

The phrase “total annual gross revenues” means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).

If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues for purposes of this test should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year.

  Question: How can an issuer determine whether it qualifies as an “emerging growth company” as of the effective date for the definition of that term?

  Answer: Under the JOBS Act, an “issuer shall not be an emerging growth company for purposes of [theSecurities Act and the Exchange Act]…if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.”

The phrase “first sale of common equity securities” in the JOBS Act is not limited to a company’s initial primary offering of common equity securities for cash. It could also include offering common equity pursuant to an employee benefit plan on a Form S-8 as well as a selling shareholder’s secondary offering on a resale registration statement.

Even if the issuer had a registration statement declared effective on or before December 8, 2011, as long as the first sale of common equity securities occurs after that date, an issuer may qualify as an emerging growth company, assuming the other requirements of the definition are satisfied.

  Question: How should an emerging growth company identify itself as an emerging growth company in a draft registration statement submitted on a confidential basis and in the subsequent electronic filing of the registration statement on EDGAR?

  Answer: The issuer should disclose that it is an emerging growth company on the cover page of its prospectus.

  Question: Can an issuer that qualifies as an emerging growth company amend its registration statement to provide the scaled disclosure available to emerging growth companies if the registration statement was initially filed prior to April 5, 2012?

  Answer: Yes. The emerging growth company may provide the scaled disclosure available to emerging growth companies in a pre-effective amendment to a pending registration statement or in a post-effective amendment.

  Question: How many years of audited financial statements are required to be included in an emerging growth company’s registration statement other than the registration statement for its initial public offering of common equity securities?

  Answer: The provision permitting the filing of only two years of audited financial statements is limited to the registration statement for the emerging growth company’s initial public offering of common equity securities. Although the provision is limited to the initial public offering registration statement, the SEC will not object if, in other registration statements, an emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities.

The complete Q&As from the SEC can be accessed here http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.

For more information about whether crowdfunding would be appropriate and beneficial in your situation, consult with your attorney and accountant.