New Opportunities in Corporate Finance for Domestic and Foreign Companies
Jonathan Frank, Motti Slomovics & Audrey Hourse
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Barack Obama.
It is comprised of six titles, the last of which went into effect in May of 2016. The JOBS Act contains seminal changes to U.S. federal securities law. The legislation effectively deregulates in the areas of capital raising and SEC reporting.
This article shall serve to (i) provide a summary of the JOBS Act and (ii) highlight key considerations for non-U.S. companies in connection with the legislation.
General Summary of the JOBS Act
I. Emerging Growth Companies
Title I, also commonly referred to as The IPO On-Ramp, is designed to facilitate the process of going public. It applies to companies with less than $1 billion in annual gross revenues (“emerging growth companies”, or “EGCs”), providing EGCs with the option of scaling their disclosure and compliance requirements gradually in connection with an IPO. The advantages include:
- up to 5 years of forbearance from certain reporting requirements leading up to, during and immediately after the IPO
- the ability to pitch the IPO to institutional investors before filing papers
- the option to initiate the IPO process confidentially
- a provision to opt out of certain Sarbanes-Oxley and Dodd-Frank provisions related to accounting and executive pay disclosures
- permission for analysts employed by the underwriter to publish reports immediately upon earnings release
II. Private Placements
Title II liberalizes (i) the way a company may advertise its private placement offering to potential investors and (ii) the way in which securities bought in a private placement may be advertised in the secondary market. More specifically, Title II:
- lifts the ban on general solicitation for Rule 506 private placement offerings in connection with accredited investors – solicitation remains restricted with non-accredited investors
- enables offers to be made in the secondary market without a holding period to non-Qualified Institutional Buyers, allowing for general advertisement (actual sales remain restricted)
Crowdfunding refers to a means of raising funds by which small amounts are solicited from a large number of people. Under the JOBS Act, brokers and funding portals can serve as intermediaries for fund raising. The amount of annual investment per investor is subject to restrictions based on the investor’s annual income. An issuer is permitted to raise up to $1 million over a 12-month period. The issuer has certain disclosure requirements with the SEC, its intermediary and (potential) investors. Annual reports are required on the issuer’s operations and financial statements and the issuer is required to use U.S. GAAP. Under Title III, the full funding goal must be met or no sales of securities shall occur.
IV. Regulation A
Title IV splits Regulation A offerings into two categories: Tier 1 and Tier 2. For Tier 1 offerings, the JOBS Act raises the fund raising cap from $5 million to $20 million. Importantly, Tier 1 offerings remain subject to “blue sky” laws and thus issuers must remain compliant with securities laws in each jurisdiction in which securities will be offered. Ongoing reporting requirements are minimal for Tier 1 offerings. For Tier 2 offerings, the JOBS Act raises the fund raising cap from $5 million to $50 million. Tier 2 offerings are not subject to “blue sky” laws, but remain subject to traditional ongoing reporting requirements. Further, non-accredited investors may invest only 10% of the greater of income or net worth in any single Tier 2 offering.
V–VI. Exchange Act Registration and Deregistration
Titles V and VI adjust regulations which require companies to go public. With respect to the threshold limit for shareholders of record, the JOBS Act raises the limit from 500 to 2,000, as long as the shareholders of record are accredited (threshold for non-accredited shareholders remains at 500).
Key Considerations for Foreign Private Issuers
A foreign company will qualify as a foreign private issuer (“FPI”) if 50% or less of its outstanding voting securities are held by U.S. residents; or if more than 50% of its outstanding voting securities are held by U.S. residents and none of the following three circumstances applies: the majority of its executive officers or directors are U.S. citizens or residents; more than 50% of the issuer’s assets are located in the U.S.; or the issuer’s business is administered principally in the U.S.
Title III (Crowdfunding) and Title IV (Regulation A) of the JOBS Act are directed to the domestic U.S. market. The issuer must be a U.S. entity under Title III and either a U.S. or Canadian entity under Title IV.
Relief provided under the JOBS Act in connection with IPOs applies to FPIs, including that of a confidential filing of an IPO registration statement, the ability to communicate with institutional investors before filing papers, the distribution of pre-IPO research, relaxed disclosure requirements and reporting requirements in connection with Sarbanes-Oxley and Dodd-Frank. The SEC has made clear that the relief provided under the JOBS Act will benefit FPIs in addition to the existing concessions for SEC-registered IPOs afforded to foreign private issuers (vis-à-vis Form 20-F concessions).
FPIs can reap the benefit of the JOBS Act’s Title II legislation for private placements. The JOBS Act provisions apply only to offerings conducted under Rule 506 and Rule 144A – they do not apply to offerings conducted under Section 4(a)(2) (formerly 4(2)) (traditionally, frequently used by FPIs).
With respect to Articles V-VI, Exchange Act registration threshold requirements have historically not been an issue for FPIs due to Rule12g3-2(b), which relies on the availability of home country disclosure. The JOBS Act can assist certain FPIs that do not wish to make the required 12g3-2(b) disclosures.
Jonathan Frank is a member of DBM’s corporate, international, and intellectual property and art law practice areas. Mr. Frank concentrates on corporate law, mergers & acquisitions, and intellectual property law matters, both domestically and internationally.
Mr. Frank’s clients come from a variety of industries, ranging from large public and private to early stage companies. He advises on private equity investments and capital raising transactions. Mr. Frank counsels companies in the digital currency sector and he has significant experience advising tech companies.
Prior to joining DBM, Mr. Frank worked as an associate at the law firm of Jones Day and spent a portion of his career working in China.
Mr. Frank is proficient in Spanish and conversant in Mandarin. He is admitted to the bar of the State of New York. Mr. Frank received his Juris Doctorate from Benjamin N. Cardozo School of Law and his Bachelor of Arts from Dartmouth College.
Audrey Hourse is a French law graduate of Paris II Assas and Paris I la Sorbonne. She studied both French and German law and lived in Germany for three years where she obtained an L.L.M in German business law from Cologne University. She graduated in May 2016 with an L.L.M in Banking, Corporate and Finance from Fordham School of Law.
She is a French native and speaks English and German fluently.
Dunnington, Bartholow & Miller LLP is a full-service law firm providing corporate, litigation, intellectual property, real estate, immigration, taxation and estate planning services for an international clientele. Find out more at www.dunnington.com.