Signed into law on April 5, 2012, the “Jumpstart Our Business Startups” Act (“JOBS Act” or “the Act”), was designed to spur economic growth by relaxing the regulatory requirements for small or new companies seeking access to capital from the public markets. The JOBS Act created what has been termed the IPO On-Ramp—a transition period of relaxed or phased requirement for companies as they go through the IPO registration process and in the five years directly thereafter. This article will explain the major provisions of the JOBS Act to help you understand what is required of your company as you prepare for an IPO.
Emerging Growth Company
The JOBS Act created a new category of company with special regulatory requirements called an Emerging Growth Company (EGC). As the name suggests, EGCs are relatively small companies that are likely experiencing major growth. A company can qualify as an EGC until the earliest of the following conditions:
- The last day of the fiscal year during which total annual gross revenues exceed $1.07 billion
- The last day of the fiscal year following the fifth anniversary of the date of the first public sale of common equity securities
- The date on which the issuer has, during the previous three-year period, issued more than $1 billion in non-convertible debt
- The date on which such issuer is deemed to be a “large accelerated filer1”
Any company that does not yet meet any of the conditions above qualifies to be an EGC, regardless of its jurisdiction of incorporation or organization, thus, even foreign private issuers can receive the designation. Meeting the qualifications to be classified as an EGC is a prerequisite for the special rules discussed in this article.
The JOBS Act was passed to make it easier for companies to gain access to public capital, especially through an IPO. It created the IPO On-Ramp, a series of special rules and conditions for EGCs that make the requirements for soon-to-be and newly public companies less burdensome. The following sections present the details of the most important changes enacted by the JOBS Act, click on each drop-down for more information:
Summary of JOBS Act Changes for EGCs
Impact of the JOBS Act
The results of the JOBS Act have been mixed—especially in the context of an ever-changing market. In 2012, when the JOBS Act was signed, there were 128 IPOs, and in the years following, the numbers increased dramatically (222 in 2013, 275 in 2014, and 170 in 2015). However, in 2016, the number of IPOs declined to 102, lower than before the Act was signed into law. Therefore, it appears that the JOBS Act spurred some market activity initially, but the results are inconclusive. It can be difficult to attribute market activity—both positive and negative—directly to a piece of legislation, which makes evaluating the effectiveness challenging.
Some opponents to the JOBS Act were concerned that by reducing the amount of required disclosures, it would expose investors to greater risks and more uncertainty. A smaller timeframe of financial information necessarily gives investors a less complete picture of an emerging company, which means that greater risk is possible. Particularly, crowdfunding poses an interesting dilemma, because it requires very few financial disclosures, but can be used to raise significant amounts of money—up to $1 million. When the JOBS Act was passed, these risks of a less transparent process were deemed acceptable in order to generate more economic growth; but, as early-stage funding sources continue to evolve outside of traditional angel investors and venture capital, it is possible that less-sophisticated investors could be hurt by decreased transparency and fewer regulatory restrictions. Time will tell if the benefits outweigh the heightened risks.
The JOBS Act makes the transition from a nonpublic to public company easier, primarily by decreasing the immediate regulatory requirements prior to an offering, and extending the IPO On-Ramp through the years right after the IPO. To help you in your IPO preparation, we have presented the most salient points of the current JOBS Act here. However, we recognize that the JOBS Act is dynamic, and the SEC will continue to make changes that you will need to be aware of. As you consider going public and review the various requirements put forth by the SEC, it is important that you determine if your company qualifies as an EGC issuer before you can take advantage of the available benefits. The IPO process is complex and demanding, but for many young companies, the JOBS Act eases some of that burden.
- Practical Law Company, “A Quick Guide To The JOBS Act”
- Latham & Watkins, “JOBS Act Establishes IPO On-Ramp”
- JOBS Act Text
- Harvard Law School Forum on Corporate Governance and Financial Regulation, “The JOBS Act: Did It Accomplish Its Goals?”
- EY, The JOBS Act: 2015 mid-year report
- SEC Announcement on the expansion of confidential filing allowance
- SEC Public Statement on Dodd-Frank by Michael Piwowar
- Large Accelerated Filer: A public company becomes a large accelerated filer when it first meets the following conditions at the end of its fiscal year:
i. An aggregate worldwide market value of voting and non-voting common equity of $700 million or more, as of the last business day of the company’s most recently completed second fiscal quarter
ii. The company has been subject to the requirements of section 13(a) and 15(d) of the Securities and Exchange Act for at least 12 calendar months
iii. The company has filed at least one annual report pursuant to section 13(a) or 15(d) of the Securities and Exchange Act
iv. The company is not eligible to use the requirements for smaller reporting companies
- An accredited investor, for individuals, is a person who: (a) had income in excess of $200,000 (or $300,000) with a spouse) in each of the prior two years, and expects the same for the current year, and (b) has a net worth over $1 million, either alone or with a spouse (excluding the value of a primary residence or any home-related loans).
- A presentation (or presentations) by a company that is preparing to conduct an IPO to potential buyers—such as analysts, fund managers, and large potential investors. The road show has a marketing purpose, and is expected to generate excitement and interest in the upcoming IPO.
- Under Dodd-Frank, public companies are required to have a nonbinding/advisory vote on the company’s executive compensation program at least once every three years.
- A vote to determine whether the say-on-pay vote will be held annually, biannually, or triennially
- When a company seeks shareholder approval of a merger or acquisition, it will be required to conduct a separate shareholder advisory vote to approve the disclosed golden parachute compensation arrangements between the target company and its own named executive officers or those of the acquiring company.
- As part of Dodd-Frank, a rule that requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.
- A disclosure of the relationship between executive compensation and the financial performance of a company, also with comparisons to peer companies.