In April 2012, the Jumpstart Our Business Startups Act was signed in to law with high hopes for streamlining and eliminating many barriers that emerging companies face when attempting to raise capital. It has now been four years since the JOBS Act went into effect, and while many of the regulations carrying out the JOBS Act only recently went into effect, it is important to ask the question — Has the JOBS Act been successful in improving companies’ access to capital as Congress promised? The results are mixed. Here are two examples.
The most successful provision of the JOBS Act to date clearly has been the IPO “on-ramp” for emerging growth companies. Title I of the JOBS Act provides benefits to newly registered public companies, known as “emerging growth companies” or “EGCs,” by easing them into the SEC’s reporting requirements over a five-year “on-ramp” period. EGCs are generally defined as companies with total annual gross revenues of less than $1 billion during the most recently completed fiscal year.
If a company meets the EGC definition, then during the on-ramp period the company will enjoy relief from a number of reporting, disclosure, and auditing requirements. Moreover, in one of the greatest benefits of EGC status, the EGC is able to submit the registration statement for its IPO to the SEC confidentially and does not have to file a public registration statement until 21 days prior to the commencement of the EGC’s roadshow.
According to Ernst & Young’s JOBS Act 2015 mid-year update, since April 2012 approximately 83% of all publicly filed IPO registration statements and 85% of IPOs that went effective were filed by EGCs. In addition, approximately 87% of the EGCs that have filed IPO registration statements since Title I was enacted have taken advantage of the confidential registration statement SEC review process, according to EY’s statistics.
These are impressive numbers, and they indicate that companies are taking advantage of the JOBS Act provisions which provide more freedom and flexibility during the capital-raising process. The EGC on-ramp provides flexibility to issuers, reduces costs by permitting scaled disclosure in SEC filings, and allows companies to test the waters of the capital markets without undue scrutiny, which are welcome benefits for entrepreneurs, company executives, and the investing public.
On the other hand is crowdfunding, addressed in Title III of the JOBS Act. As structured in the act, it appears to have an uncertain future. The basic concept behind crowdfunding is to enable entrepreneurs to access capital via the internet without registration from a large number of small investors, many of whom may be non-accredited investors. The federal crowdfunding exemption was authorized under Title III of the JOBS Act, and the SEC adopted final rules implementing crowdfunding in October 2015, which become effective May 16, 2016.
Equity crowdfunding has been a very hot topic for many years. Despite this excitement, there has been substantial frustration with the final regulations which provide more, not less, restrictions on capital raising. The attractiveness of the crowdfunding concept was that it was going to be an efficient and streamlined way to raise capital, mostly free from regulatory constraints that pose barriers to many companies — particularly early-stage companies — from raising meaningful capital.
However, the final rules impose numerous offering caps, disclosure, and reporting requirements, and requirements to conduct the offering exclusively through a crowdfunding intermediary (such as a funding portal or broker-dealer), which make crowdfunding impractical and costly.
As a result, the promise of securities crowdfunding has been muted, at least for now. There are certainly legitimate regulatory concerns about bad actors and securities fraud relating to crowdfunded offerings, particularly with the use of the internet to raise capital. But the SEC’s crowdfunding rules should be revisited to strike a more common-sense balance between legitimate regulatory concerns and the freedom to use the internet to raise capital.
In particular, companies are likely to use crowdfunding more if the per-investor and per-offering caps are raised, and the funding intermediary requirement (which is very costly for issuers) is eliminated. In sum, unless the regulatory requirements for crowdfunded offerings are pared back, companies will continue to perceive that the costs of crowdfunding outweigh its benefits, and thus Title III will not be widely used.
The experience of the JOBS Act at its four-year anniversary, taking into account the results of all four sections so far, indicates companies will use the capital-raising techniques that provide the most flexibility, impose the least regulatory burdens, result in lower costs to the company and shareholders, and generally provide the most freedom to secure capital. The JOBS Act so far has produced mixed results, and only time will tell if it ultimately will be considered a success.
David P. Hooper is a partner in the corporate department of Barnes & Thornburg’s Indianapolis office. Hooper concentrates his practice in the areas of securities, financial institutions, investment management, private investment funds, and mergers and acquisitions.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.