Senate Passes JOBS Act; Big Changes in Startup and Growth Financing on the Horizon

The Jumpstart Our Business Startups (JOBS) Act will most likely be law before the end of next week.  The bill that was passed by the U.S. House on March 8 was passed by the Senate yesterday, March 22, with only one amendment on so-called “crowdfunding” (raising funds in small amounts from a large number of investors), and the House is expected to take up the amended bill on Monday for expedited passage and delivery to President Obama, who has signaled he will sign the bill when it reaches his desk.

The JOBS Act eases several existing securities laws and regulations to make it easier and less costly for startup and emerging growth companies to raise capital privately and in less-regulated IPOs, including:

    •  Creating a new category of issuer, the “emerging growth company,” which is an issuer with less than $1 billion in total annual gross revenue, that would be able to include only two, rather than three, years of audited financial statements in its IPO registration statement and be permitted to omit auditor’s attestation on internal financial reporting controls and not submit to say-on-pay or CEO pay frequency rules during a transitional “on-ramp” period following the IPO.

    •  Removing the prohibitions against general solicitation and advertising in private offerings under Regulation D, provided that all purchasers of securities are accredited investors.

    •  Providing a “crowdfunding” exemption from registration permitting companies to issue securities having a value of up to $1 million in any 12-month period, provided sales to any one investor do not exceed certain percentages of the investor’s annual income, with the highest cap at 10%.

    •  Raising the limit for Regulation A offerings, which are subject to fewer disclosure requirements, from $5 million to $50 million, and exempting Regulation A offerings from state securities laws when the securities are (i) offered or sold through a broker-dealer or on a national exchange or (ii) sold to a qualified purchaser, as defined by the SEC.

    •  Increasing the 1934 Act registration shareholder-of-record threshold from 500 to 2,000, provided no more than 500 such holders are non-accredited investors, and excluding employees receiving company securities under employee benefit plans when calculating the number of record holders.

The Senate’s amendment increases the House bill’s restrictions on raising money in the crowdfunding context, requiring (i) companies raising money through crowdfunding to provide information about their financial condition, business plan and shareholder risks, (ii) web organizers of crowdfunding to register with the SEC, and (iii) paid company promoters to reveal their relationship.  The amendment also adds a sliding scale of investment caps: at the bottom of the scale, individuals making less than $40,000 per can invest only up to 2% of their annual income in a startup in a 12-month period, while those earning more than $100,000 can invest up to 10%.