On March 27, 2012, the U.S. House of Representatives
passed the Jumpstart Our Business Startups Act (of the JOBS Act as it is more
popularly known). President Obama is expected to sign the Act shortly. The Act
is intended to facilitate capital-raising by reducing regulatory burdens. The
Act also introduces changes designed to ease the IPO process for certain
smaller companies. Among many other things, the Act introduces changes that
could impact the potential liability exposures of directors and officers of
both public and private companies. A copy of the Act can be found here.
The Act's Provisions
Emerging Growth Companies and the IPO Process:
Many of the changes in the JOBS Act are geared toward "emerging growth
companies" (EGCs), which are defined broadly in the Act as companies with
annual gross revenues under $1 billion in the most recent fiscal year. EGCs are
relieved of certain disclosure requirements in their IPO filings. EGCs are also
allowed to file their IPO registration statement for SEC review on a
confidential basis. The Act allows EGCs to "test the waters" for a prospective
IPO by allowing the companies to meet with qualified institutional
investors or institutional accredited investors notwithstanding the pending
offering. In addition, the Act allows EGCs to discern the level of prospective
investor interest in the offering by allowing analysts to publish research
relating to an EGC notwithstanding the pending IPO.
Reduced Disclosure Requirements for Emerging
Growth Companies: The Act also provides for reduced disclosure
and reporting burdens for EGCs for a period of as long as five years after an
IPO, as long as the company continues to meet the definitional requirements. In
these provisions, the Act unwinds many of the requirements Congress only
recently added through the Sarbanes-Oxley Act and in the Dodd-Frank Act.
For example, an EGC will not be subject to the
requirements fo an auditor attestation report on internal controls as otherwise
required under Section 404(b) of the Sarbanes Oxley Act. Similarly, an EGC
would be exempt from the requirements under the Dodd-Frank Act to hold
shareholder advisory votes on executive compensation and on golden parachutes.
EGCs also are exempt from recently enacted requirements regarding executive
compensation disclosures. For example, they exempt from the requirement to
calculate pay versus performance ratios and the ratio of compensation of the
CEO to the median compensation of all employees. The EGCs also are not required
to comply with new or revised financial accountings standards until private
companies are also required to comply with the revised standard.
Private Capital Fundraising, Revised
Registration Thresholds: The Act also introduces a number of
reforms relating to private capital-raising. For example, the JOBS Act also
eliminates the prohibition on "general solicitation and general advertising"
applicable to Rule 144A offerings, provided the securities are sold only to
persons reasonably believed to be qualified institutional investors. The JOBS
Act also raises the threshold number of investors that would trigger the
Exchange Act registration requirements. Instead of the current threshold of 500
investors, the AC specifies that companies will only be required to register
their securities only after they have over $10 million in assets and equity
securities held either by 2,000 persons or by 500 persons who are not
Act also introduces measure designed to allow companies to use "crowdfunding"
to raise small amounts of capital through online platforms. The provisions
create a new exemption from registration for private companies selling no more
than $1 million of securities within any 12-month period and so long as the
amount sold to any one investor does not exceed specified per investor annual
income and net worth limitations. The crowdfunding provisions specify that
the online portals participating in these types of offerings to register
with the SEC. The Act also requires the issuing companies to provide certain
specified information to the SEC, investors and to the portal. The Act
expressly incorporates provisions imposing liability on crowdsourcing issuers
for misrepresentations and omissions in the offerings, on terms similar to the
existing provisions of Section 12 of the '33 Act.
As if often the case when legislation introduces
significant innovations, it will remain to be seen how all of these changes
will ultimately play out. (I am assuming here that President Obama will sign
the bill in due course.) This uncertainty is increased where, as here, many of
the Act's provisions (such as, for example, the crowdfunding provisions) are
subject to significant additional rulemaking.
The provisions modifying the IPO process for EGSs
unquestionably could encourage some smaller companies to "test the waters" and
perhaps even to go public sooner. The reduced compliance and disclosure
requirements for EGCs unquestionably could reduce the post-IPO costs for the
The Act's exemptions for the EGCs from many of the
compliance and disclosure requirements that Congress only recently imposed on
all public companies at least potentially could reduce the liability exposures
for Emerging Growth Companies and for their directors and officers. For
example, a company that does not have to conduct a say-on-pay vote is not going
to get hit with a say on pay lawsuit. Similarly, the elimination of
requirements for executive compensation disclosures eliminates the possibility
that those companies could be subject to allegations that the compensation
disclosures were misleading.
By the same token, the Act arguable introduces provisions
that could increase the potential liabilities of some companies. For example,
Section 302(c) of the Act expressly imposes liability on issuers and their
directors and officers for material misrepresentations and omissions made to
investors in connection with a crowdfunding offering. The crowdsourcing provisions
are subject to rulemaking, but the rules must be provided within 270-days of
the Act's enactment. Among other things, the rulemaking will clarify the
crowdsfunding issuer's disclosure requirements.
It is worth noting that these crowdfunding provisions may
blur the clarity of the division between private and public companies. The
crowdfunding provisions seem to expressly contemplate that a private company
would be able to engage in crowdfunding financing activities without assuming
public company reporting obligations. Yet at the same time, that same private
company will be required to make certain disclosure filings with the SEC in
connection with the offering and could potentially incur liability under
Section 302(c) of the JOBS Act.
These and many other changes introduced in the Act could
require the D&O insurance industry to make changes in its underwriting and
perhaps in policy forms to accommodate these changes. As was the case with the
Sarbanes-Oxley Act and the Dodd-Frank Act, the D&O insurance industry may
face a long period where it must try to assess the impact of changes introduced
by this broad, new legislation. Though many of the Act's provisions seem likely
to reduce the potential scope of liability for many companies (particularly the
EGCs), the Act could also introduce other changes that might result in
increased potential liability for other companies (particularly those
resorting to crowdfunding financing).
As a final point, it is worth noting that President Obama
has still not even signed the Act but questions about the Act are already being
raised. For example, an April
2, 2012 Wall Street Journal article, noting the post-IPO accounting
disclosures of discount coupon company Groupon, raised the concern that if the
JOBS Act had been in place, Groupon would have been able to confidentially
submit its IPO documents to the SEC, allowing its pre-IPO accounting concerns to
remain below the radar. Undoubtedly, further questions will be asked as the
JOBS Act goes into force and its provisions are implemented.
Several law firms have issued helpful memos on the Jobs
Act. A March 29, 2012 memo from the Paul Weiss law firm can be found here.
A March 2012 memo from the Jones Day law firm can be found here. Very special
thanks to the several readers who sent me links or asked questions about the
Supreme Court Issues Unanimous Opinion in
Section 19(B) Statute of Limitations: Perhaps because the issues
involved are technical, there was little notice paid to to the U.S. Supreme
Court's March 26, 2012 issuance of its unanimous opinion in the Credit
Suisse Securities (USA) LLC v. Simmonds case. The Court's opinion, which
was written by Justice Antonin Scalia, can be found here.
As discussed here,
the Supreme Court had taken up the case to address the question whether the
two-year statute of limitation period applicable to claims for short-swing
profits under Section 16(b) of the Securities Exchange Act are subject to
tolling, and if so, what is required to resume the running of the statute.
The Court held that the failure of a person subject to
Section 16 to file the specified disclosure statement does not indefinitely
toll the two-year statute of limitations. The Court said that even if the
statute were subject to equitable tolling for fraudulent concealment, the
tolling ceases when the facts are or should have been discovered by the
plaintiff, regardless of when the disclosure statement was filed. The Court
said that the traditional principles of equitable tolling should apply and
remanded the case to the district court to determine how those principles
should be applied in this case. The Court split 4-4 on the question of whether
the two-year statute functions as a statute of repose that is not subject to
The Supreme Court's ruling on this technical issue
regarding the application of the statute of limitations for short-swing profit
claims does not have a widespread impact. However, the Court's decision
eliminates the possibility that the statute could be tolled indefinitely, as
arguably might have been the impact of the Ninth Circuit's opinion in the case.
A March 30, 2012 memo from the Bingham McCutchen firm
about the decision can be found here. A March 30,
2012 memo from the Davis Polk law firm about the decision can be found here.
Point/Counterpoint on the "Dip" in
Securities Class Action Settlements: In a prior post (here),
I discussed the recent Cornerstone Research report detailing the
"dip" in securities class action settlements in 2011. In an April 2,
2012 post on the New York Times Dealbook blog (here),
two attorneys, Daniel
Tyiukody of the Goodwin Proctor firm and Gerald Silk of the
Bernstein Litowitz firm, provide their contrasting points of view on the
reported "dip." The bottom line is that the kinds of cases that have
been filed in recent years have been taking longer to settle -- and there are a
lot of cases, particularly related to the credit crisis, in the pipeline. Silk
also notes that there have been fewer restatements in recent years, and also
that there have been more individual (non-class) securities that have been
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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