Congress has approved the Jumpstart Our Business Startups Act (JOBS Act) this week. The bill, which is intended to support small businesses in raising capital and creating new jobs, now goes to President Obama’s desk and likely will be signed into law next week.
The legislation is meant to ease corporate governance and financial reporting requirements for initial public offerings and to make it easier for private companies to raise capital.
The JOBS Act would create a new category of issuers called emerging growth companies, defined as those with total annual gross revenues of less than $1 billion. Those companies would keep that status until reaching any of the following milestones:
- Reaching or exceeding total annual gross revenues of $1 billion
- Five years from the date of the company’s initial public offering (IPO)
- Issuing more than $1 billion in nonconvertible debt during the previous three-year period
- Issuer becomes a large accelerated filer as defined by the U.S. Securities & Exchange Commission (SEC), typically having worldwide public float of $700 million or more
Emerging growth companies need not present more than two years of audited financial statements in an IPO; they also do not need to present selected financial data for any period prior to the earliest audited period presented in connection with their IPO. In addition, these newly public companies would not be required to apply any new or revised accounting standard until a nonissuer is required to apply that new or revised standard.
A company cannot be classified as an emerging growth company if its first sale of common equity securities pursuant to a registered offering occurred on or before December 8, 2011.
The JOBS Act also includes provisions allowing small private companies and community banks to increase their number of shareholders to 2,000, or 500 non-accredited investors, before triggering SEC reporting requirements. It raises the deregistration threshold for community banks from 300 to 1,200 shareholders. It loosens rules on “crowdfunding,” so small companies can raise capital from a number of small investors, and allows companies to use advertisements to publicly solicit investors. It also allows research analysts to write reports about companies just before an IPO even if bankers at their firm are underwriting the offering.
While the legislation is intended to help small businesses create jobs, there are concerns the JOBS Act will not lead to increased employment. Some feel it may lead to more financial fraud; others are concerned investors will get less information and fewer safeguards than those who invest in larger public companies, potentially leading lenders and investors to demand a premium to invest and resulting in higher cost of capital. Time will tell the bill’s effects on the fine balancing act between investor protection and small business promotion.
For more information on the potential effects of this legislation, contact your BKD advisor.