Jumpstart Our Business Startups (JOBS) Act: Impact on the Biotechnology Industry

The final private company change in the JOBS Act is an increase in the SEC Private Shareholder Limit.  Private companies with more than $10 million in assets are required to register with the SEC and comply with certain reporting requirements once they cross a certain shareholder threshold. The JOBS Act raises the trigger for public reporting from 500 shareholders to 2,000 shareholders, of which 500 can be non-accredited.  This increased shareholder limit will delay costly compliance for growing companies. Additionally, the JOBS Act exempts employees compensated with stock from the shareholder count, allowing companies to hire and compensate employees competitively without further limiting their ability to raise capital from private investors. 

Implementation:

This change was self-effectuating, and is currently in place.

Crowdfunding

Policy:

The most widely-discussed provision in the JOBS Act is a new exemption from federal registration requirements for small offerings raised through Crowdfunding.  The law will allow smaller issuers to employ online tools to raise capital in small increments from a broad investor base.  Crowdfunding offerings must be conducted through an approved broker or funding portal, which must register with the SEC and provide appropriate disclosures to investors, including risk assessments and investor education materials.  Issuers may raise up to $1 million per year using the crowdfunding exemption.  Individual investors are capped on the amount they can contribute to a single crowdfunding offering – for investors whose annual income or net worth exceeds $100,000, the limit is 10 percent of their income/net worth; for investors with income or net worth below $100,000, the limit is the greater of $2,000 or 5 percent of their income/net worth. 

Implementation:

The JOBS Act gives the SEC a deadline of December 31, 2012 to propose rules on crowdfunding; however, it has become clear that they will not meet this deadline.  It is unclear at this point when the rulemaking process will be finalized.  There is also a fair degree of uncertainty surrounding what obligations funding portals will have when facilitating crowdfunding offerings and what investor protections will be put in place.  Crowdfunding cannot begin until the SEC issues rules governing the offerings.