US Congress amends securities laws to facilitate capital formation
- Proportionate disclosure regime (rights issues and SMEs)
- UK implementation of the Amending Directive
- US Congress amends securities laws to facilitate capital formation
- Proposed changes to the Takeover Code
- Withholding tax disclosure
- Executive remuneration – new votes and disclosures
- Consultations on the UK Corporate Governance Code, UK Stewardship Code and International Standards on Auditing
The Jumpstart Our Business Startups ("JOBS") Act, enacted on 5 April 2012, is intended to relieve some restraints on capital raising currently imposed by U.S. securities laws. Unless an overseas company qualifies as a “foreign private issuer", U.S. securities laws apply to foreign issuers in the same way that they apply to U.S. issuers.
Emerging growth companies
The JOBS Act eases the initial and on-going securities law compliance requirements for “emerging growth companies” seeking a public quotation in the U.S. A company going public in the U.S. with less than $1 billion in revenue is considered an emerging growth company ("EGC"), until five years from the IPO date or, if earlier, the time that the company’s revenue exceeds $1 billion, its public float exceeds $700 million, or it issues $1 billion in non-convertible debt.
Among other things, restrictions on communications in connection with an emerging growth company IPO are relaxed; an emerging growth company may file a draft IPO registration statement confidentially; some disclosure requirements are reduced; and an auditor’s attestation of the emerging growth company’s report on financial controls is not required. In addition, an EGC is permitted to approach qualified institutional buyers ("QIBs") and institutional accredited investors to determine their interest in a public offering by the EGC, although the usefulness of this provision may be limited by concerns with Rule 10b-5 and other anti-fraud provisions of the securities laws, which the JOBS Act does not abate.
General solicitation and advertisements
Most foreign issuers that seek to raise equity finance in the U.S. will rely upon one of the exemptions from the general requirement to register the offer or sale of the securities and, accordingly, produce a registration statement.
Current Securities and Exchange Commission rules prohibit companies from using any general solicitation (for example, through advertisements) to sell unregistered securities. The JOBS Act requires the SEC to amend two of its rules to permit unregistered sales, to accredited investors (under Rule 506 of Regulation D) and qualified institutional buyers (under Rule 144A), through general solicitation or general advertising. This new rule would, for example, enable a company, or a broker on a company’s behalf, to raise money by newspaper advertisement or mass solicitation, as long as the investors’ bona fides as accredited investors were confirmed prior to sale. The exemption will become available only when the SEC adopts implementing rules, required by the beginning of July 2012. As the SEC has yet to issue a proposal, it will not meet this deadline.
A person maintaining a “platform” for the offer, sale, or negotiation of a sale of securities under the amended rules would not be required to register as a broker-dealer, if that person receives no compensation or does not have custody of customer funds or securities in connection with the sale.
It is unclear whether many issuers will avail themselves of the forthcoming facility to make a general solicitation in respect of its securities. Current SEC staff interpretations permit private placement websites already, but require potential investors to be vetted as accredited investors before being permitted to view any particular offering. In this context, the new rules merely defer the vetting until an investor decides to invest. In addition, offering participants, such as local investment banks, normally have a large network of accredited investors and QIBs and may well conclude that a general solicitation or advertising would be unlikely to assist significantly with the marketing exercise.
Offerings less than $50 million
The JOBS Act requires the SEC to create a Securities Act exemption for an issuer’s securities sales of up to $50 million in a 12-month period. The exemption is likely to be patterned after the existing Regulation A exemption, which permits U.S. issuers not subject to the Exchange Act reporting regime to make public sales of up to $5 million in each 12 months.
Offerings under the new exemption generally would be subject to state “Blue Sky” securities laws. The SEC is given wide latitude to fashion disclosure requirements relating to the new exemption, but there is no deadline by which the SEC is required to adopt rules, so the exemption’s utility remains to be seen.
In addition to charitable or political purposes, “crowdfunding” has been a means for funding startup businesses or particular business projects, when contributors had no investment intent and received no continuing interest in the venture. The JOBS Act crowdfunding exemption permits a company to sell publicly up to $1 million in investment securities in each 12 months, subject to per-investor limits and restrictions that appear disproportionate to the small amounts that can be raised.
Elaborate disclosure, including audited financial statements for offerings exceeding $500,000, must be provided to investors and filed with the SEC, and sales may be made only through a licensed broker or registered “funding portal". These intermediaries, in turn, are made responsible, among other things, for conducting background checks on the issuer’s principals, ensuring investors understand investment risks, and confirming that investors comply with their individual annual investment limits. Given that greater sums can be raised more easily under current law, much use of the crowdfunding exemption seems unlikely.
Exchange Act registration
Prior to adoption of the JOBS Act, a company with more than 500 record holders (and at least $10 million in assets) was required to register under the Exchange Act and, thereafter, to comply with periodic reporting and proxy solicitation requirements (among others). The Act changes the number to either 2,000 stockholders or 500 non-accredited investors. Shares issued pursuant to employee compensation plans and the crowdfunding exemption are excluded from the count. Large private employers will be able to use stock compensation more widely, without risking going public.
David C Fischer is a partner in the New York office of Loeb & Loeb LLP.