ON Securities

What Should Public Companies Know About the JOBS Act?

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act (PDF), which increases the ability of companies to access capital without registration under the Securities Act and encourages initial public offerings of "emerging growth companies." For those of you who have only received 500 law firm alerts about the JOBS Act and are anxious to read your 501st, you should review the Maslon Legal Alert, which is refreshingly short.

The JOBS Act focuses mainly on privately-held companies: early stage companies seeking investors through private placements, and companies preparing to file a registration statement for their initial public offering (IPO). However, officers and boards of directors of companies that are already publicly held might be interested to know the answer to this question: Will the JOBS Act will have any impact on public companies? (Note: Although this post may be the 502nd submission you will receive on the legislation, it may be the first on this particular topic.)

The answer: for most public companies, the impact is probably very limited. However, there are aspects of the new law that might become relevant to some public companies:

Impact on SEC Rulemaking. Practically speaking, the biggest impact might be on the SEC rulemaking timetable. In the JOBS Act, Congress followed its time-honored tradition of creating an impossible time frame for the SEC to adopt related rules. For example, within 90 days of enactment, the SEC is required to adopt new rules eliminating the prohibition of general solicitation in certain private placements to accredited investors. Within 270 days of enactment, the SEC is required to adopt rules creating the new “crowdfunding” exemption. Also, the SEC is scrambling to prepare FAQs regarding some of the requirements that went into effect immediately - see the SEC's Frequently Asked Questions page, including a set of FAQs posted today on the emerging growth company provisions described below. This blog post by Broc Romanek in TheCorporateCounsel.net Blog speculates that the JOBS Act requirements may set back the SEC’s existing rulemaking projects timetable under the Dodd-Frank Act.

Relaxed IPO Requirements. For companies going public that qualify as “emerging growth companies” (generally, companies with less than $1 billion in annual gross revenues), some of the SEC review requirements for going public are eased, and these companies are also relieved of some compliance requirements (e.g., Say-on-Pay votes) for up to five years, as long as the company continues to qualify as an emerging growth company. These new standards do not affect existing public companies.

However, sometimes, new public companies are created by existing public companies in a so-called minority IPO or equity carve-out, creating a new subsidiary and causing the subsidiary to go public. This method can create a vehicle to finance one of the business units of a public company. There is no apparent reason that these provisions cannot be used by a subsidiary of an existing public company. The new provisions may make this approach more popular. These subsidiaries have the additional advantage of relaxed governance requirements, as “controlled companies” under applicable rules of Nasdaq and the New York Stock Exchange.

Relaxed Private Placement Requirements. The JOBS Act, upon adoption of new SEC rules, will also permit issuers to engage in general solicitations in connection with private offerings under Rule 506 (one of the Regulation D exemptions) and Rule 144A of the Securities Act, as long as the issuer reasonably believes that the investors are exclusively accredited investors, or qualified institutional buyers, respectively. These requirements are intended to be useful to privately held companies seeking capital. However, the statutory provisions under the JOBS Act are not restricted to private companies. In limited circumstances, the relaxed requirements may be useful to public companies doing private placements of public equity (PIPE transactions) or Rule 144A offerings of certain securities to institutional investors. However, we will have to wait for the SEC rules to see how helpful these provisions will be.

Easier for Banks and Holding Companies to Go Private. The JOBS Act contains a provision that allows banks and bank holding companies to go private if their equity securities are held of record by fewer than 1,200 persons. The threshold was previously 300 shareholders, as with other public companies. In addition, all companies can now exclude employees who received their securities in connection with their employment. See the SEC's FAQs on these provisions of the JOBS Act.

Therefore, some public companies will have an interest in watching the SEC’s rulemaking process, to see whether any of the above developments will benefit them. Otherwise, you can just wait for the next 500 law firm alerts on the JOBS Act.

Thanks to my colleagues, Alan Gilbert and Brad Pederson, for their help with this post.
 

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