5 Things Entrepreneurs Need to Know About the JOBS Act

This past spring, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act), which makes substantial changes to securities laws by making it easier for startups and small businesses to raise funds, stay private longer, and avoid or delay some of the burdens that come with taking a company public. The JOBS Act will come into effect over the course of 2012, culminating with the SEC’s much-anticipated crowdfunding rules being issued by the SEC at the end of the year. Below are the most important provisions of the JOBS Act and what you as an entrepreneur should be thinking about now to take advantage of these changes in the future.

1. Cap on Private Equity Holders Increased

What You Should Be Thinking About Now:

Consider whether your company’s organizational documents and related shareholder or investor rights agreements need to be revised in light of the revised shareholder threshold and possibility of increased secondary sale activity.

Before:

Private issuers would have to register a class of securities with the SEC if they were held of record by 500 people or more, which would also subject them to the burdensome reporting obligations of public companies.

After:

The JOBS Act increases the threshold from 500 to 2,000 holders of record, as long as no more than 499 of those 2,000 holders of record are not “accredited investors.” Excluded from this calculation are those who obtained equity under the company's equity compensation plans and investors who purchased securities pursuant to the crowdfunding exemption discussed below. This allows companies to avoid going public longer and to freely give equity compensation to employees without the fear of being forced to register as a public company. The ability of more companies to stay private longer may also lead to a more robust secondary market for shares of private companies than currently exists.

2. Some General Solicitation Prohibitions Eliminated

What You Should Be Thinking About Now:

If your private company is looking to raise capital under the Rule 506 exemption, start thinking about how you will let the right people know about your company and its goals. Will you contact accredited investors directly, send the information to investing communities and email lists, contact websites and blogs whose readership includes people interested in your product or service, use social media tools, or some combination of these methods? Companies should also consider what impact these methods may have on the company’s image or credibility and ability to attract desirable investors.

Before:

Private companies that sell equity often rely on the exemption from registration with the SEC under Rule 506 of Regulation D. In exchange for lifting the burden of registering securities, any exemption under Regulation D does not allow the issuer to engage in general solicitation or advertising of the offering. This means that there must be a “pre-existing relationship” between the offeror and the offeree, and one offer without such a relationship would make the exemption inapplicable and trigger the registration requirement.

After:

The JOBS Act amends Rule 506 to allow general solicitation or advertising if all purchasers qualify as "accredited investors" under SEC rules. By eliminating any restrictions on who the securities may be offered to, issuers may now announce that they are seeking funding to anyone, including through a website or email, without worrying about losing the exemption. This greatly widens the pool of potential investors for private companies, especially those without wealthy friends. Issuers must take “reasonable steps” that will be determined by the SEC to verify that all purchasers are accredited investors.

3. Fewer Burdens on “Emerging Growth Companies”

What You Should Be Thinking About Now:

If you see your company going public in the future, consider the new benefits of going public while your company qualifies as an EGC. The scaled disclosures, regulatory requirements, and more limited governance obligations of an EGC will reduce the costs of going public, and the enhanced confidentiality in the registration process allow an EGC to resolve presentation and disclosure issues in its registration statement out of the public eye.

Before:

Previously, all companies were subject to the same IPO procedures and reporting obligations, regardless of revenue or other factors.

After:

The JOBS Act introduces the “Emerging Growth Company” (EGC), which is a company with less than $1 billion in revenue. The regulatory burdens that come with going public are reduced for EGCs, and certain SEC compliance measures are phased in over time. Any issuer that priced its IPO before December 9, 2011 does not qualify as an EGC.

The IPO perks given to EGCs include: