The JOBS Act - Impact on Community Banks
Quick Summary. On March 27, 2012, the House of Representatives passed the Jumpstart Our Business Startups Act (the "JOBS Act"). The Senate had adopted an identical version of the JOBS Act last week. The legislation is being sent to the White House for execution by President Obama, and he is expected to sign the bill shortly.
The JOBS Act is intended to ease the burden of capital formation on emerging companies, with the stated purpose of fostering economic growth and job creation. The JOBS Act has six major titles, each containing an initiative designed to reduce the regulatory burden on capital raising. Several of these provisions are of significant interest to community banks and bank holding companies. Herein we summarize these and other provisions of the JOBS Act.
Exchange Act Registration and Termination of Registration
Under current law, any company with total assets of more than $1 million and a class of equity security held of record by 500 or more holders is required to register under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Once a company is registered under the Exchange Act, it must provide periodic reporting (i.e., Quarterly reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K as required), follow the SEC's proxy disclosure requirements, and implement most of the corporate governance requirements of the Sarbanes-Oxley Act. Title V of the JOBS Act increases both the asset threshold and the number of shareholder threshold for required Exchange Act registration.
Under Section 5.01 of the JOBS Act, the asset threshold is increased to $10 million of assets, and the shareholder threshold is increase to either 2,000 holders of record, or 500 holders of record who are not "accredited investors". In addition, Section 502 of Title V excludes from the definition of "held of record" excludes shares held by persons who received the shares under an employee compensation plan in transactions exempt from registration.
As a practical matter, it is unclear how much relief this provision may provide to banks or bank holding companies. Since bank securities are generally exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), many bank offerings are not conducted as "private placements," and therefore the bank or its successor holding company may not be able to determine whether its shareholders are accredited investors or not.
Title V of the JOBS Act would become effective immediately.
Title VI of the JOBS Act contains additional provisions aimed specifically at banks and bank holding companies. Under Title VI, a bank or bank holding company need not register under the Exchange Act unless it has a class of equity security held of record by 2,000 or more persons. The 500 non-accredited shareholder requirement included in Title V of the JOBS Act does not apply to banks or bank holding companies.
More importantly, Title VI amends the provisions of Section 12(g) of the Exchange Act permitting a company which is currently subject to the Exchange Act to terminate its filing requirements. Under current law, in order to terminate an issuer's filing obligations, the issuer must have less than 300 record holders. Title VI of the JOBS Act amends this provision to increase the number of record holders to 1,200, thereby permitting many banks or holding companies which have undertaken community offerings, and so wound up with a large number of record owners, to terminate their reporting obligations.
Pursuant to Section 6.02 of the JOBS Act, the provisions of Title VI of the JOBS Act are not self-effectuating. These provisions require rule making by the SEC. The Commission is directed to adopt rules no later than one year after the date of enactment of the JOBS Act to implement the changes adopted in Title VI. Therefore, the relief provided by Title VI may not be available for some time.
Amendments to Private Placement Rules - General Solicitation
Under current SEC regulations, companies engaging in a private placement of securities must solicit investors without engaging in general solicitation. This means that general advertising and community investor meetings are prohibited under the SEC's current private placement rules.
Title II of the JOBS Act directs the SEC to revise its rules within 90 days of the adoption of the JOBS Act to eliminate the prohibition on general solicitation in private placements under Section 5.06 of Regulation D, provided that all purchasers of the securities in the offering are accredited investors.
Although it is difficult to judge the impact of this provision until the SEC adopts the required regulations, the elimination of the prohibition on general solicitation should make it easier to attract investors to a private placement, thereby making capital more available.
Amendments to Regulation A
Existing Regulation A exempts certain small securities offerings from SEC registration requirements. Historically, the exemption has not been used frequently, in part because of the requirements imposed under the regulation. Title IV of the JOBS Act requires the SEC to adopt regulations to increase the exemption offered by Regulation A to offerings of up to $50 million in securities, to permit the securities to be offered or sold publicly, and to ensure that securities sold under this exemption are not deemed "restricted securities."
Although these mandated changes may make Regulation A a more viable alternative to a traditional Regulation D private placement, we will not be able to determine the full impact until the SEC has promulgated the required regulations.
Title III of the JOBS Act ads a new offering exemption to the Securities Act for "crowd funding transactions". These transactions involve broad-based capital raising from small investors, primarily through internet portals.
The terms of the new provision are generally as follows:
- Crowdfunding is available to issuers raising no more than $1 million in any 12-month period. This amount is subject to increase for inflation.
- Investors are limited in the total amount they can invest in any crowdfund offerings during a 12-month period, as follows:
- The greater of $2,000 or five percent of the investor's annual income or net worth, if either annual income or net worth is less than $100,000.
- Ten percent of annual income or net worth (not to exceed $100,000), if either annual income or net worth is equal to or greater than $100,000.
- Sales must be made through a broker or "funding portal" that is registered with the SEC. The "funding portal" is a new concept, referencing individuals acting as intermediaries that do not offer advice, solicit sales of securities, or compensate employees or agents based on sales.
- Intermediaries would be required to reduce the risk of fraud by performing background checks on officers, directors and significant stockholders of issuers. The SEC may adopt additional antifraud rules.
- Intermediaries must also require investors to complete questionnaires demonstrating their knowledge of the speculative risk of investment in emerging companies, including lack of liquidity.
- Intermediaries must ensure investor funds are not provided to the issuer until a previously established target offering amount is reached. The funds would be returned to the investors if the target was not reached.
- A one-year holding period would generally be required for securities purchased in a crowdfund offering.
- Stockholders who purchase shares in crowdfund offerings will not be counted toward the 2,000 record shareholder threshold necessary for registration under the Exchange Act.
Title I of the JOBS Act is designed to reduce the regulatory burden and cost for companies going public by delaying the application of certain requirements of the Exchange Act to companies defined as "emerging growth companies". As a general matter, these companies must have revenues of less than a billion dollars, and have a total public float of less than $700 million.
As a practical matter, these provisions treat emerging growth companies similar to the treatment of "smaller reporting companies" under SEC reporting requirements. Therefore, for companies that are or would qualify as "smaller reporting companies" under current SEC regulations, Title I of the JOBS Act does not provide much additional relief. However, for a company that, based on its public float, would not qualify as a "smaller reporting company" but which would be an "emerging growth company", the provisions of Title I will make public company status somewhat less burdensome for newly public companies.
Title I of the JOBS Act also includes several provision which may make the going public process a little less burdensome. Section 105 of the JOBS Act permits emerging growth companies to "test the waters" with institutional accredited investors or qualified institution buyers without being subject to the "gun jumping" restrictions under Section 5 of the Securities Act. In addition, the JOBS Act permits an emerging growth company to submit a draft of its IPO registration statement to the SEC confidentially, as long as the registration statement and all amendments are publicly filed not later than 21 days before the issuer begins its road shows.
The next step with regard to implementation of the JOBS Act will be its signature by President Obama, and then implementation of those provisions requiring the adoption of regulations by the Securities and Exchange Commission. As regulations are issues by the SEC, we will continue to update you on their impact.
Please do not hesitate to contact Bob Schwartz if you have any questions.