Breaking down the JOBS Act
How emerging-growth companies could benefit from eased capital access regulations.
December 6, 2012
The Jumpstart Our Business Startups (JOBS) Act of 2012 was designed to spur economic development by easing regulations in an effort to enable access to public capital markets for small businesses.
To that end, the legislation, aimed at so-called emerging-growth companies (EGC), allows certain private companies to enlist more investors without having to register securities activity with the SEC. A variety of provisions, collectively known as the “IPO on-ramp,” also lessen the regulatory burdens associated with undergoing an initial public offering. Meanwhile, newly formed public corporations face reduced reporting requirements.
But the JOBS Act definition of an EGC determines which companies can realize those benefits. And the definition encompasses many companies across many industries.
Here are four key things to know about the JOBS Act:
1. EGC definition and requirements
An EGC is virtually any business with less than $1 billion in annual revenues undergoing an IPO. EGC status remains with a company until one of the following events occurs:
2. Greater private company investment allowed
Prior to the JOBS Act, a private company that exceeded 500 shareholders and had more than $10 million in assets had to register that activity with the SEC. Now, a company with more than $10 million in assets will not have to register until it has 2,000 shareholders, or 500 shareholders who meet the SEC definition of “nonaccredited” investors.
Rule 501, Regulation D of the Securities Act of 1933 provides a detailed definition of an accredited investor. That definition encompasses various types of entities, as well as persons whose individual or joint net worth exceeds $1 million, not counting a primary residence’s value, or whose income levels for a consecutive two-year period exceed either $200,000 or $300,000 on an individual or a spousal joint income level, respectively.
With those provisions, the JOBS Act allows smaller companies to raise more capital from a pool of investors that extends beyond wealthy individuals, venture capital firms or other entities accustomed to supporting startups.
3. Pre-IPO communication constraints eased
Companies, investors, and others generally face strict restrictions as to what they can do during the IPO process. The JOBS Act eases constraints facing those various stakeholders.
An EGC can confidentially file registration statements with the SEC for review and feedback, rather than having that statement information subject to public disclosure. During that span, the JOBS Act also allows a company to communicate with institutional accredited investors and qualified institutional buyers.
Those provisions make it much easier for a company to test the waters during the IPO registration statement filing process, and determine whether it wishes to proceed with those plans.
4. Lower initial reporting requirements for public corporations
A company planning an IPO usually has to submit three years’ worth of audited financial statements; an EGC entering the IPO process only needs to file statements covering two years. An EGC also faces relaxed reporting requirements pertaining to executive compensation disclosure and certain other disclosures.
Once an EGC becomes a public corporation, it has a five-year phase-in period for complying with provisions of the Sarbanes-Oxley Act of 2002, rather than the two-year span typically granted to newly formed public corporations. An EGC is also exempt from having to meet any new or revised accounting standards until compliance with those measures is required from private companies.
Rate this article 5 (excellent) to 1 (poor). Send your responses here.
Dale Jensen, CPA, CFE, is a partner in assurance services at Weaver, an accounting firm with offices throughout Texas.