The JOBS Act After One Year

A year ago, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a legislative product of rare bipartisan collaboration that was intended to improve employment and make it easier for smaller firms to raise private equity. (For an overview of the Act's provisions, refer here.) Twelve months later, many of the rules needed to implement the JOBS Act remain uncompleted and the legislation's promise remains largely unfulfilled.

As detailed in a March 29, 2013 Washington Post article entitled "JOBS Act Falls Short of Grand Promises" (here), "nearly a year after its enactment, major portions of the act are in limbo, and other parts have failed to measure up to the grandiose job-creation promises."

The JOBS Act was specifically intended to aid "Emerging Growth Companies" (ECGs), which the Act defined as companies with annual revenues under $1 billion. Among other things, the Act was intended to make it easier for these companies to go public. It would be hard to make the case that the JOBS Act has delivered a boost to initial public offerings. As detailed in a March 27, 2013 Wall Street Journal article entitled "JOBS Act Sputters on IPOs" (here), in the twelve months since the Act's passage IPOs of ECGs "are on track to fall 21% to 63 from 80 in the prior year." The Journal article does note that a number of market and economic factors "helped chill the climate for IPOs over the past year" and "the IPO market is showing signs of improving health."

Another concern about the IPOs that are taking advantage of the Act's provisions is that some may not be exactly represent the kind of companies Congress had in mind. For example, one of the companies that completed its offering while taking advantage of the JOBS Act's so-called "IPO on-ramp" provisions, was Manchester United, a 135 year old sports club based in Manchester, England, that, though obviously unlikely to create any U.S. jobs, nevertheless qualified as an "Emerging Growth Company." As Jason Zweig noted in his August 3, 2012 Wall Street Journal article entitled "When Laws Twist Markets" (here), among the other companies taking advantage of the JOBS Act provisions are "blank check companies," noting that "In an irony only Congress could foster, many of the blind pools rushing to list under the JOBS Act have no employees and say in their prospectuses that they might never hire anybody at all."

Even for ECGs that completed IPOs after the JOBS Act was enacted, the impact of the IPO on-ramp provisions has been mixed. A January 2013 memo from the Skadden firm entitled "The JOBS Act: What We Learned in the First Nine Months" (here) analyzed the 53 ECGs that completed IPOs between April 5, 2012 ad December 15, 2012. The memo relates that certain of the Act's provisions, such as the provision allowing draft registration statements to be submitted confidentially and the provision allowing ECGs to provide scaled-down executive compensation disclosure, have met with "strong acceptance." Other provisions such as the option for ECGs to provide an abbreviated period of financial statement disclosure, have met with only "weak acceptance." Yet other provisions, such as those allowing "test the waters" communications in advance of the offering, have met with "mixed acceptance." As pointed out in the March 2013 issue of CUG.COMments (here), while "certain aspects" of the JOBS Act "have been seized upon by ECGs," the ECGs' "utilization of the available benefits" has been "inconsistent."

While the IPO on-ramp provisions have had a mixed effect, the "most significant bits" of the Act, according to a March 30, 2013 Economist article entitled "America's JOBS Act: Still Not Working" (here) are "bottled up at the SEC." Most importantly, the SEC still has not issued rules to implement the Act's provisions relating to Crowdfunding. The SEC also has not issued rules to allow companies to raise as much as $50 million in the public markets without undertaking reporting obligations, nor has it issued rules lifting restrictions on advertising private securities offerings.

Among the reasons for the delays on the crowdfunding rules has been an internal debate within the SEC about the best approach to take. According to the Economist, Mary Shapiro, the outgoing SEC chairman was concerned that the JOBS Act would "eliminate important protections for investors" and she was particularly critical of the crowdfunding provisions. It remains to be seen what the approach will be of the incoming chair, Mary Jo White; at a minimum, it may be many months before the final rules are put into effect.

My earlier post on concerns about problems with crowdfunding can be found here. A more basic question concerns who will actually be able to take advantage of crowdfunding, given the Act's statutory constraints, an issue I discussed here.

According to the Post article linked above, the Act's mixed record has occasioned some concerns and even regrets on Capitol Hill. There is now a perception in Washington that the Act, described in the article as "a grab bag of ideas cobbled together for greater impact," was "hastily introduced" and enacted due to election year pressures with "record speed." The result, according to unnamed critics, is "laws fraught with risks to investors." At a minimum, the Act "underscores how difficult it can be for Washington to spur job creation even when there's strong bipartisan consensus on a plan."

The picture is not entirely negative. According to the Journal, biotechnology companies, which have been "a bright spot for IPOs during the past year," appear to be "using the new rules more than other companies." Many biotech firms are unprofitable when they go public and they find that "the ability to save time and money by taking advantage of the relaxed standards was beneficial."

Among many others concerned with the Act and its possible implications, D&O insurers continue to weigh the Act's effects. For now, most insurers continue to await developments, particularly the introduction of the crowdfunding rules. The insurers remain concerned about possible crowdfunding abuses and about the liability measures in the crowdfunding provisions. Some insurers have already started adding crowdfunding exclusions to their private company D&O insurance policies. At a minimum, the delays attending the Act's implementation have introduced an element of uncertainty, which likely has increased the insurers' general wariness. The general perception seems to be that the Act could still have a significant impact on the scope of policyholders' potential liability, but exactly what that might mean remains to be seen. Even after a year, the Act's impact remains unclear, for insurers as for other observers and commentators.

About the Ruling in the Consolidated Libor-Scandal Antitrust Litigation: Readers interested in Judge Buchwald's opinion in the consolidated Libor-scandal antitrust litigation (about which refe here), and who are wondering what remains after the recent rulings and what the implications may be for the other Libor-related lawsuits will want to review Alison Frankel's April 1, 2013 post on her On the Case bliog (here). Frankel has a detailed analysis of what portions of the consolidated cases remain after the ruling, as well as what it all might mean for the other cases before Judge Buchwald as well as the cases that have not yet been consolidated in her court.

Yet Another Modest Securities Suit Settlement Involving U.S. Listed Chinese Company: During 2010 and 2011, plaintiffs' lawyers rushed to file lawsuits against U.S.-listed Chinese companies that caught up in various accounting scandals. However, as I have previously noted, even the cases that have survived the preliminary motions have produced only very modest settlements.

In the latest example of one of these cases settling modestly, on April 1, 2013, the plaintiffs' lawyers in the securities suit involving Deer Consumer Products announced that the case had been settled for $2.125 million. As noted in the parties' stipulation of settlement (here), the settling defendants include the company and two individuals, although the released defendants appear to include all of the Deer company-related defendants. The settlement does not appear to involve the payment of any insurance funds; the stipulation recites that the settlement amount "shall be paid exclusive by the Settling Defendants."

As I recently noted (here, second item), the exceptions to this pattern of the securities suits against U.S.-listed companies settling modestly are the cases in which there are significant settlement contributions from the companies' outside professionals. For example, as discussed in the recent post, the recent $20 million settlement in the case involving Sinotech Energy Limited included an $18 million settlement contribution from the company's offering underwriters. And of course there is the eye-popping $117 million settlement payment by Ernst & Young in the Ontario securities class action lawsuits involving Sino Forest.

The plaintiffs' lawyers in the Deer Consumer Products, perhaps recognizing the impact of the claims against the Chinese companies' outside advisors, on March 9, 2013 filed a separate action in the Central District of California against the company's outside auditors, Goldman Kurland Mohindin,  in what appears to be something of a second phase of litigation.

Rule 10b5-1 Trading Plans: "Avoiding the Heat": The SEC promulgated Rule 10b5-1 in order to allow company insiders to safely trade in their company securities without incurring liability under the securities laws. As it has turned out, trading under Rule 10b5-1 plans has been a source of significant scrutiny, as I recently noted here. Nevertheless Rule 10b5-1 trading plans can still provide significant liability protection, if they are set up, implemented and maintained appropriately.

A March 11, 2013 memo from the Covington & Burling law firm entitled "Rule 10b5-1 Trading Plans: Avoiding the Heat" (here) lays out the practical steps that companies and their executives can take to try to take advantage of the Rule and to avoid the issues that have caused problems with trading plans in the past. The memo's authors note that "remains a beneficial and frequently utilized provision to permit corporate insiders to sell the securities of their companies while minimizing the risk of engaging in insider trading." However, they add that "public companies and insiders seeking to rely on Rule 10b5-1 should renew their focus on ensuring that their trading plans comply with the requirements of the rule."

Read 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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