JOBS Act for Private Companies: Qualifications, Impacts

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The Jumpstart Our Business Startups (JOBS) Act was signed into law April 5, 2012.

What is the JOBS Act?

The JOBS Act is intended to bolster economic growth by providing private companies with greater access to capital and certain regulatory exemptions for public offerings.

Critics of the legislation have concerns that company reporting and fiduciary responsibilities to investor protection may be compromised.

4 Essential Questions for Understanding How the JOBS Act Impacts Private Companies

  1. What are the key aspects of the JOBS Act?
  2. What qualifies an issuer for “Emerging Growth Company” status?
  3. What is the impact of the JOBS Act on SOX requirements?
  4. What are some of JOBS Act concerns for investor protection?

1. What are the key aspects of the JOBS Act?

The JOBS act establishes a new category of public company referred to as “Emerging Growth Company” (EGC). This new classification is available to qualifying issuers for a five-year period after IPO (IPO on-ramp period).

How the JOBS act exempts the EGC from certain public company requirements during the on-ramp period:

  • Provides more than two years of audited financial statements and selected financial data in its IPO registration statement.
  • Adopts new or revised accounting standards effective for public companies (private company effective dates apply)
  • Gives private companies greater access to capital:
  • Increases the number of record holders that trigger public registration obligation to 2,000 investors (accredited investors, except for bank issuers) from 500 investors.
  • Allows small investor “crowd-funding” limited to $1 million within a 12-month period; “Crowd-funding” refers to raising equity capital from multiple small investors (e.g., equity sales via internet, subject to caps based on investor net annual income/net worth) without adding to the record holder count.

2. What qualifies an issuer for “Emerging Growth Company” status?

In order to qualify for Emerging Growth status, a revenue test is conducted to identify whether you make more or less than $1 billion in annual gross revenues during the most recently completed fiscal year.

Reasons why you may cease to qualify during an Emerging Growth on-ramp period:

  • Annual revenues exceed $1 billion, and/or
  • Market capitalization exceeds $700 million thus deemed to be ‘large accelerated filer’, and/or
  • Issuing of more than $1 billion in non-convertible debt during the previous three year period

Important dates for qualifying for Emerging Growth status:

  • Effective date: first sale of common equity securities, pursuant to an effective registration statement, must occur after December 8, 2011 (cannot qualify if on or before this date).
  • Determination date: issuer must qualify as an EGC at the time of submitting a confidential draft registration statement and each subsequent amendment submitted confidentially. Issuer must also determine whether it qualifies at the time it engages in permissible test the waters communications.
  • Disclosure: issuer should disclose EGC status on the cover page of its prospectus included in both its confidentially submitted draft registration statement and in its publicly filed registration statement.

3. What is the impact of the JOBS Act on SOX requirements?

  • SOX 404(a) — Management’s assessment requirement for internal controls over financial reporting remains applicable.
  • SOX 302/906 — CEO and CFO quarterly certifications remain applicable.
  • SOX 404(b) – EGC is exempt from auditor attestation requirement for internal controls over financial reporting (JOBS Act, Title I, Section 103).

In addition, the SEC Division of Corporate Finance Staff has indicated EGCs should consider discussing their status and related risks, including exemption from SOX 404(b) auditor attestation requirement for internal controls over financial reporting, in confidentially submitted draft registration statements and in publicly filed registration statements.

4. What are some of the JOBS Act concerns for investor protection?

Not requiring SOX 404(b) compliance (auditor attestation) for EGC issuers will decrease the rigor around internal controls over financial reporting and disclosures.

Enabling submission of confidential drafts of IPO documents to the SEC decreases investor transparency.

Exemption from new accounting rules will lead to disparate financial reporting.

“Crowd-funding” investments will create an opportunity for fraudsters to take advantage of this leniency in raising funds.

Final Thoughts on the Impacts of the JOBS Act for Private Companies

Private companies need to consider how the JOBS Act affects their plans for accessing private or public market capital, and whether to opt in or out for ECG status, if qualifications are met:

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