President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law on April 5, 2012. BIO advocated strongly for this new law, which includes several important policies designed to stimulate capital formation for growing businesses, including those in the biotech industry. Some of the new policies were self-effectuating, while others are awaiting rulemaking at the SEC. Below is a summary of the relevant provisions in the new law, along with a status update on the implementation process for each.
The most impactful new provision in the JOBS Act is the IPO On-Ramp, which provides several exemptions and allowances to smaller companies looking to go public. Companies with a public float below $700 million and revenues below $1 billion (called emerging growth companies, or EGCs, by the JOBS Act) are given a five-year transition onto the public market and are provided exemptions from certain burdensome regulations, including the external attestation of internal controls required by Sarbanes-Oxley Section 404(b) and executive compensation disclosures mandated by Dodd-Frank. The On-Ramp also contains provisions relating to availability of information on EGCs, increasing the information flow by relaxing “gun-jumping” regulations to allow companies to test the waters before going IPO and by allowing securities analysts and broker-dealers to publish information about an EGC going public. Additionally, EGCs are now able to submit a confidential draft registration statement (S-1) to the SEC for review.
The provisions in the IPO On-Ramp were self-effectuating and EGCs are already eligible to take advantage of the new allowances. BIO analysis of public S-1s reveals that over 70 companies have filed as EGCs, 18 of which were in the biotech industry. This analysis does not take into account any EGCs who have filed confidential S-1s, although SEC staff have indicated that there has been broad interest in the confidential filing process as well.
There are also provisions in the JOBS Act that are targeted for private companies wishing to access capital but stay private. The first of these is a reform to SEC Regulation D. Under Rule 506 of Reg D, issuers are allowed to raise an unlimited amount of capital via a private offering to an unlimited number of SEC accredited investors. (Accredited investors are defined as those with $200,000 in annual income or $1 million in net worth, excluding their primary residence.) The JOBS Act directs the SEC to lift the ban on general solicitation and general advertising currently in place under Reg D, Rule 506. As it stands, companies cannot advertise their Reg D offerings, so they are limited to a “friends and family” bucket of investors. When the SEC has finished the rulemaking process, companies will be able to broadly advertise, increasing the capital they can bring in.
The JOBS Act gave the SEC a deadline of July 4, 2012 to propose a rule on Reg D. The SEC missed that deadline, but proposed a rule on August 29. The proposed rule requires that issuers take “reasonable steps” to verify that purchasers in a Reg D offering are accredited investors. In order to provide sufficient flexibility to accommodate the different types of issuers and different types of accredited investors, the proposed rule does not specify the methods necessary to satisfy the “reasonable steps” requirement.
BIO provided comment on this proposed rule prior to the October 5 deadline. We expect further SEC action at some point next year, but it is unclear at this point whether the SEC will make changes to the proposed rule and issue a final version or re-propose a new rule for comment. Until a new rule has been finalized, the old regulations banning general solicitation and general advertising will stay in place. Thus, companies are not currently able to take advantage of JOBS Act changes to Reg D.
The JOBS Act also mandates changes to SEC Regulation A. Currently, companies can conduct a direct public offering under Reg A with relaxed registration and disclosure requirements, provided the offering is less than $5 million. The JOBS Act directs the SEC to raise the offering limit to $50 million, expanding the usefulness of conducting such an offering.
The JOBS Act does not set a deadline for the SEC to issue a new Reg A rule (sometimes called Reg A+). As such, the SEC has indicated that the Reg A changes will likely be of lower priority so that staff can implement JOBS Act changes that do have deadlines as quickly as possible. The SEC has not finalized a new rule on Reg A yet, so the current $5 million cap is still in place.
SEC Private Shareholder Limit
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.
This change was self-effectuating, and is currently in place.
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.
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.