Going public without registering
The JOBS Act expands the exceptions to Regulation A of the amended Securities Act of 1933, enabling small businesses to raise up to $50 million in capital through public offerings every 12 months, without registering with the SEC. The old limit was $5 million. Kaplan Voekler Cunningham & Frank partner Thomas Voekler says "the JOBS Act is getting back to main street investing and getting smaller companies listed on an exchange. We're talking about small to mid-sized companies being able to raise capital, which has been closed to them. The hope is that the SEC can continue the forward press on getting these rules out, to reduce the regulatory burden to raise capital, hopefully on a more Main Street, regional focus." Sounds great, right? The JOBS Act had very strong support from both parties in Congress, with the Senate voting in favor by 73 to 26, while the House of Representatives voted 380 to 41 in favor, but the SEC is dragging its feet on the implementation of the law. The SEC is required to implement its final regulations per the JOBS Act within one year of the bill's signing, which makes sense, considering that the bill is meant to jumpstart a very slow economic recovery. However, for Regulation A, Kaplan says "the market is hoping to see the rules finalized by the second quarter of 2014."
The "IPO Onramp" of the JOBS Act makes it much easier for small to mid-sized businesses to go public by relaxing for five years the reporting requirements for registered companies with annual revenue of less than $1 billion. Emerging companies are also allowed to do a "secret filing" in order to gauge interest and test the market for an IPO. The good news for smaller companies looking to raise capital in the public markets is that this part of the legislation was effective immediately by statute. Michael Zuppone -- a partner in the Corporate practice of Paul Hastings in the firm's New York office -- says that the IPO Onramp "also reduced requirements with respect to required financial statements and compensation disclosures, which were considered an immediate benefit. There were some fairly immediate SEC staff interpretations. So that element of the JOBS act seems to be functioning, with the benefits envisioned by Congress making their way into the marketplace."
An SEC rule proposal on advertising IPOs.
As required under the JOBS Act, the SEC on Aug. 29 proposed rules to eliminate the ban against general solicitation for most public offerings, meaning that securities issuers will now be able to use public advertisements in newspapers or on the Internet to spur interest from investors, although the issuer will be required to take "reasonable steps to verify that the purchasers of the securities are accredited investors."
Another aspect of the JOBS Act that should make it easier for local businesses to attract capital is the easing of the rules that require companies with more than 500 shareholders to register with the SEC. Kaplan says that "the JOBS act has increased that number to 2000, as long as no more than 500 investors are classified as non-accredited investors. The SEC still has to make some rules over determining who is accredit and not." The community based aspect of some of the new fundraising that will be allowed by the JOBS Act -- once the rules are implemented -- also promises to bring the "social media revolution" to investing. Companies will have an easier time building a loyal base of local investors, many of whom can also be customers. "Raising money locally not only creates community involvement, it creates transparency that has eluded the local market, which has been limited to private investments," says Kaplan. "Private transactions meant that once the offering was closed, the company wasn't subject to reporting requirements. Now people are going to be involved, they are going to understand these businesses."