On March 22, 2012, the Senate passed the Jumpstart Our
Business Startups (JOBS) Act by a vote of 73-26. The House of Representatives
passed the JOBS Act on March 8, 2012 by a vote of 390-23. The Senate bypassed
its typical committee process to rush the bill to a floor vote. Legislators in
both parties and the President have adopted the JOBS Act as an election-year
demonstration of their commitment to small businesses and entrepreneurialism,
and they have paid little heed to strongly-worded opposition from SEC Chairman
Mary Schapiro, state regulators and organizations ranging from the Council for
Institutional Investors to the AARP.
The approved Senate bill contains an
amendment authored by Sen. Jeff Merkley (D-OR) which replaces the "crowd-funding"
exemption contained in Title III of the House version. Senate Democrats were
unsuccessful in attempts to amend other provisions of the JOBS Act.
As we blogged following the House's passage of the JOBS Act, this bill represents a
watershed change to the laws and regulations governing capital raising for
private companies, in addition to creating a scaled regulatory compliance
pathway, referred to as an "IPO on-ramp," for companies going public and newly
public companies. Please see our prior blog for a more complete description of the JOBS Act,
including many provisions not discussed in this post.
What does the Senate bill say about
The Senate version of the JOBS Act replaces most of Title
III of the House version of the bill. Title III establishes the new
crowdfunding exemption, which is designated as Section 4(6) of the Securities
Act. The Senate version of the crowdfunding exemption has the following
It appears that securities sold under the crowdfunding
exemption would be "restricted securities" and therefore subject to Rule 144
restrictions for public resales. It appears that the one-year restriction on
resale described above would apply to private as well as public resales.
Investors who purchase securities in transactions under
the crowdfunding exemption would not count against the holders of record test
that triggers reporting obligations for companies under Section 12(g) of the
Exchange Act. Moreover, offerings under the crowdfunding exemption would
pre-empt state blue-sky qualification laws (though the SEC must make
information available to the states to facilitate state enforcement of
anti-fraud laws). States may require notice filings, but only a state in which
purchasers of an aggregate of 50% or more of the securities being offered
reside may charge a fee in connection with such notice. States also may not
regulate funding portals except for enforcement of anti-fraud laws.
Within 270 days after the enactment of the JOBS Act, the
SEC would be required to adopt rules for the crowdfunding exemption, including
rules disqualifying "bad boys" from using the exemption.
How is the Senate version different from the
Key differences from the House version of the JOBS Act
How is the Senate version different from
Regulation D, Rule 504?
The Senate version of the crowdfunding exemption is more
restrictive in many ways than existing Rule 504 under Regulation D. Rule 504 permits
an issuer to raise up to $1 million during a 12-month period with no mandatory
disclosures, no investor qualifications and no limits on individual
investments. Rule 504 also has no limits on general solicitation and does not
restrict resales so long as the offer is qualified in at least one state.
Offerings under Rule 504 are not preempted from state regulation.
The Senate's version of the crowdfunding exemption
appears more restrictive than Rule 504 in every respect except:
In our experience, few emerging growth companies use Rule
504 because the $1,000,000 limit is too low to meet anticipated funding needs
and because of the costs and delays of the blue-sky process. We question
whether emerging growth companies would find the Senate's version of the
crowdfunding exemption attractive, and whether intermediaries will find the
business sufficiently profitable to justify the regulatory burden.
Did the Senate tighten any other provisions
of the JOBS Act?
No. In particular, the Senate did not change Title II,
which permits general solicitation for Rule 506 offerings provided that all
purchasers are accredited. Rule 506 may therefore serve as a type of
"crowdfunding" exemption for accredited investors without any of the
limitations in Title III related to the new Section 4(6) exemption for
crowdfunding. The unlimited nature of the Rule 506 exemption may prove to be
troublesome for investments targeted to seniors and other vulnerable persons
who may meet the net worth test for accredited investors but not be suitable
investors for early stage businesses.
As required to be amended or replaced by the Title IV of
the JOBS Act, Regulation A will also be available as a type of crowdfunding
exemption, and may prove to be more appealing to issuers and intermediaries and
more satisfactory from an investor protection standpoint.
What will happen next?
The Senate version of the bill will go back to the House
of Representatives for consideration. House Majority Leader Eric Cantor (R-VA)
has said he plans to hold the final vote early in the week of March 26.
President Obama has said he will sign the bill Congress approves.
What should I do now?
The JOBS Act is not currently law, so existing laws,
regulations and rules applicable to capital raising and public reporting remain
in effect. Issuers with ongoing offerings or offerings about to commence must
continue to comply with existing laws, regulations and rules.
Regardless of the outcome of reconciliation of the House
and Senate versions of the crowdfunding exemption, the changes that appear all
but certain to be implemented by the JOBS Act will fundamentally alter the
methods companies have used to raise capital for the last 30 years. While there
will certainly be significant changes in the markets for growth capital, it is
too early to predict how markets, issuers and intermediaries will react to the
rule changes. For example, it is too early to predict what impact general
solicitation will have on the success of Rule 506 offerings or whether the
crowdfunding exemption or the new Regulation A exemption will become viable
fundraising alternatives for companies seeking growth capital and/or public
markets in their securities.
Companies and entrepreneurs should monitor this situation
closely and expand their medium- and long-term thinking around capital raising
to accommodate the changes that appear to be imminent.
What if you have questions?
For any questions or more information on these or any
related matters, please contact any attorney in the firm's corporate practice
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Formosa (650-815-2631, firstname.lastname@example.org)
Karalis (858-720-7466, email@example.com)
participated in drafting this posting.
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