JOBS Act Heralds New Era for Startup and Emerging Growth Company Financing

JOBS Act Heralds New Era for Startup and Emerging Growth Company Financing

by Karl J. Ege,Martin E. Lybecker, Danielle Benderly, and James T. Carroll

The JOBS Act's stated purpose is to spur job creation and economic growth by improving access to capital for emerging growth companies. To do so, the JOBS Act will make some of the most significant changes to the U.S. securities law landscape in over a generation. Perkins Coie experts provide an overview of the securities law changes under the JOBS Act, as well as implications for private investment companies.

Excerpt:

 As forecast, on March 27 the U.S. House passed the Senate's amended version of the Jumpstart Our Business Startups Act (the JOBS Act), clearing the way for President Obama to sign the bill into law, which occurred on April 5, 2012

The JOBS Act's stated purpose is to spur job creation and economic growth by improving access to capital for emerging growth companies. To do so, the JOBS Act will make some of the most significant changes to the U.S. securities law landscape in over a generation.

Although opinions vary on whether the JOBS Act will indeed drive job creation and economic growth or result in adverse unintended consequences, there is a clear consensus that the impact of the JOBS Act will be fundamental and far-reaching. Future Updates will be forthcoming as the Securities and Exchange Commission (SEC) meets its rulemaking obligations under the JOBS Act.

Securities Law Changes Under the JOBS Act

The JOBS Act eases several existing securities laws and regulations to make it easier and less costly for a startup or emerging growth company to raise capital either privately or through a less-regulated initial public offering.

- Relaxes 500-Shareholder Threshold for Exchange Act Registration. The JOBS Act amends Section 12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act), to raise the threshold at which an issuer must register its securities with the SEC from 500 to 2,000 shareholders of record- provided that fewer than 500 such holders are non-accredited investors-and provides that employees receiving company securities under employee benefit plans are excluded when calculating the number of record holders for this purpose.

- Relaxes Requirements for New Category of "Emerging Growth Companies." To improve access to capital markets, the JOBS Act creates a new category of issuer, the "emerging growth company," with relaxed initial public offering (IPO) registration requirements.

- What Is an "Emerging Growth Company"? The JOBS Act defines an emerging growth company as an issuer with less than $1 billion in total annual gross revenue during its most recently completed fiscal year. Such a qualifying company will continue to be deemed an emerging growth company until the earliest of

  • the last day of the fiscal year during which it has total annual gross revenue of $1 billion or more,
  • the last day of the fiscal year following the fifth anniversary of its IPO,
  • the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt, and
  • the date on which it is considered to be a "large accelerated filer" under the Exchange Act (in short, when the public equity float reaches $700 million and the company has been public for at least one year).

New Category Applies Retroactively for IPOs After December 8, 2011. The JOBS Act also applies the definition of an emerging growth company retroactively to any issuer meeting the requirements so long as its IPO occurred after December 8, 2011.

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Karl J. Ege, is Senior Counsel at Perkins Coie. He returned to private practice after serving for more than 15 years as Chief Legal Officer for Russell Investments. While in that role he had global responsibility for Russell's legal, compliance, internal audit and risk management functions and was instrumental in developing Russell's international business. Although retired from Russell, he remains a director of the Russell 20-20 Association. At Perkins Coie Karl advises senior executives and boards on matters involving corporate governance, internal controls and corporate investigations. Karl is also involved in advising the firm's investment and financial services clients and emerging companies, as well as assisting on the firm's efforts in Asia, Europe and Latin America.

Martin E. Lybecker is a partner in the Perkins Coie's Business practice. Martin is considered to be a leader in the development of the legal theories with regard to the substantial growth of bank securities activities. He also has considerable experience representing the insurance industry in disputes over the authority of banks to engage in insurance underwriting. Martin serves as counsel to investment companies and their independent directors, investment advisers, broker-dealers, depository institutions and their holding companies, insurance companies, and several financial services trade associations.

Danielle Benderly is a partner at Perkins Coie, and specializes in assisting public companies with their corporate governance and securities regulation, reporting and compliance needs, including insider trading issues under Section 16, Rule 144 and Rule 10b-5. Danielle's practice also focuses on advising public and emerging growth companies, as well as individual executives, with respect to stock-based executive compensation design and interpretation issues, including for securities offerings, M&A transactions and ongoing securities compliance and disclosure obligations. Danielle is a frequent author and speaker on these issues.

James T. Carroll is an associate in the Perkins Coie's Emerging Companies practice and focuses his practice on the representation of start-up and high-growth technology companies in matters of corporate finance and securities, venture capital, mergers and acquisitions, and corporate governance.