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>> ALERT THE JOBS ACT EASES REGISTRATION REQUIREMENTS AND RESTRICTIONSThe Jumpstart Our Business Startups (JOBS) Act, which was signed by President Obama on April 5, 2012, could significantly improve fundraising prospects for many businesses.

BACKGROUNDThe regulatory requirements currently affecting financing efforts by companies in the United States are often characterized as overly burdensome and expensive, discouraging entrepreneurship and economic growth. The JOBS Act promises to alleviate some of these regulatory burdens by loosening registration requirements under the Securities Act of 1933 (the Securities Act), and the Securities Exchange Act of 1934 (the Exchange Act).

Under the Securities Act, any offer or sale of securities must either satisfy the registration requirements imposed by the statute and related Securities and Exchange Commission (SEC) rules or qualify for exemption from these requirements. Due to the expense and delay that registration entails, issuers of all sizes often use exempt offerings to raise capital, but the exemptions come with their own requirements that can limit their utility. One of the most significant changes made by the JOBS Act is its mandate that the SEC lift the restrictions on general solicitation and general advertising of exempt private offerings.

The JOBS Act also relaxes initial public offering (IPO) and Exchange Act disclosure requirements for “Emerging Growth Companies,” allows for regulated crowdfunding, and increases the amount of securities eligible for exemption under Securities Act Section 3(b). Finally, the JOBS Act raises the threshold for Exchange Act registration, thereby allowing companies that have sold securities privately to delay the date on which they must begin to incur the burden and expense of complying with the Exchange Act’s public company reporting and governance requirements.

“IPO ON-RAMP” EASES DISCLOSURE REQUIREMENTS FOR “EMERGING GROWTH COMPANIES”Title I relaxes some of the initial and ongoing reporting requirements for a new category of issuer, titled “Emerging Growth Company” (EGC). In addition, Title I gives EGCs opportunities to gauge investor interest in an IPO, and their own stomach for the IPO process, before committing to it completely. EGCs are defined as companies with revenues of less than $1 billion in the most recent fiscal year.

Most significant among the changes made by Title I, EGCs:

>>>> need only provide two years of audited financial statements and selected financial data,

>>>> can file their initial registration statements with the SEC confidentially, and

>>>> can “test the waters” by reaching out to potential institutional investors to gauge interest in an IPO before filing a registration statement.

AUGUST 2012

Attorney Advertising1025

THE BOTTOM LINE

The JOBS Act improves the capital

formation environment for issuers

of all sizes by expanding the

number and utility of exemptions

from Securities Act registration,

easing disclosure and corporate

governance requirements for

Emerging Growth Companies,

and making it easier for an issuer

to avoid becoming subject to the

reporting and corporate

governance requirements of the

Exchange Act prematurely.

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Reduced financial disclosure requirements will ease the time and expense of preparing an IPO registration statement. Confidential filing should enable new registrants to iron out disclosure issues with the SEC privately and, if necessary, abandon or delay a registration without public embarrassment. This provision, and the ability to test the waters, should permit companies to make more informed decisions about the pros and cons of going public before they commit to the process.

REMOVAL OF THE PROHIBITION AGAINST GENERAL SOLICITATION AND GENERAL ADVERTISINGRule 506 of Regulation D under the Securities Act is a safe harbor that permits issuers to sell securities to an unlimited number of “accredited investors” and up to 35 other persons without complying with the Securities Act’s registration requirements. However, until now the rule has required that the securities to be sold in an exempt offering could not be offered through any form of general solicitation or general advertising. For many companies, this restriction made it difficult to find investors, especially if the company lacked contacts or could not persuade a professional placement agent to help locate investors for a fee.

Title II effectively eliminates this prohibition by directing the SEC to revise Rule 506 to make the prohibition against general solicitation and advertising inapplicable to private

offerings as long as the securities are sold only to accredited investors. Once the SEC amends Rule 506 to comply with Title II, issuers seeking capital will be able to use a variety of methods, including the internet, newspapers, radio and even television, to reach a broader range of potential investors. This should certainly make it easier for companies to find investors.

CROWDFUNDING PROVIDES ACCESS TO MORE INVESTORS, THOUGH AT A PRICETitle III introduces a novel method of fundraising previously unavailable for the sale of securities. Commonly known as “crowdfunding” or “crowdsourced funding,” when implemented by SEC rules mandated by the statute, this new exemption from the registration requirements of the Securities Act will permit companies to pool money from individuals who make small contributions in return for a stake in the venture.

Due to concerns that crowdfunding might become a venue for fraudsters, the JOBS Act imposes significant restrictions and requirements on the exemption that may severely limit its utility. Issuers can raise no more than $1 million in any 12-month period through crowdfunding and are subject to limits on the amount that each investor can contribute. In addition, issuers must use a registered broker-dealer or “funding portal” to effect a crowdfunded offering, must provide

investors with registration-type disclosure, and must provide the SEC and investors with annual financial and business operations disclosure after the offering. The issuer and all of its officers and directors are jointly and severally liable to investors for false statements in the offering disclosure materials. Finally, issuers may not advertise crowdfunded offerings, the broker-dealer or funding portal may not release the proceeds of the offering to the issuer until a specified funding target is attained, and investors will not be able to sell the securities for a year after purchase.

Given these requirements and the relative freedom that companies will soon have under Rule 506, it seems unlikely that many companies will pursue crowdfunded offerings.

REGULATION A+Title IV creates a new exemption under Section 3(b) of the Securities Act, dubbed “Regulation A+,” that authorizes the SEC to set the parameters for a new category of exempt offerings. Like the existing Section 3(b) exemption, fleshed out in the SEC’s Regulation A, it will subject issuers’ offering documents to SEC review. Due to the higher $50 million ceiling of new “Regulation A+,” issuers who previously avoided Regulation A because of its $5 million offering limit may find the new exemption an attractive means of raising financing. While Regulation A+ will require that issuers file annual audited financial

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statements with the SEC, the securities sold in the offering – unlike those sold in a private placement – will not be “restricted securities” and therefore will be freely tradable in the market.

EXCHANGE ACT SHAREHOLDER THRESHOLD RAISEDWhen an issuer’s securities are registered under the Exchange Act, the issuer becomes subject to the periodic reporting and corporate governance requirements of the Exchange Act. An issuer must register under the Exchange Act before its shares can be listed on a national securities exchange. But registration is mandatory, whether or not an issuer’s shares are listed on an exchange, when specified shareholder and asset thresholds are crossed.

Title V raises the shareholder threshold for mandatory Exchange Act registration from 500 or more holders of record to a dual standard of 2,000 or more holders of record or 500 or more non-accredited holders

of record. Shareholders who obtain shares through an employee benefit plan or in crowdfunding offerings do not count towards these thresholds. The other threshold requirement, that the issuer have more than $10 million in assets, is unchanged.

Title VI applies a single standard of 2,000 or more holders of record for mandatory registration of banks and bank holding companies and allows such issuers to deregister if they have fewer than 1,200 holders of record; other issuers continue to be required to have fewer than 300 holders of record to deregister.

By increasing the shareholder threshold, the JOBS Act has enabled issuers to stay private longer, until the benefits of listing their shares on a public market outweigh the expense and burden of Exchange Act compliance.

CONCLUSIONBy removing the prohibition against general solicitation and advertising for Rule 506 offerings to accredited investors, the JOBS Act greatly

improves the ability of issuers to seek out potential private investors during capital fundraising. The IPO “On-Ramp,” crowdfunding exemption, and Regulation A+ exemption provide companies with new capital formation options. And by increasing the shareholder threshold for mandatory Exchange Act registration, the JOBS Act removes a significant impediment to capital formation by small businesses. All of these changes hold the promise of helping to reinvigorate the American capital markets.

FOR MORE INFORMATION

Ralph W. Norton Partner 212.468.4944 rnorton@dglaw.com

or the D&G attorney with whom you have regular contact.

Davis & Gilbert LLPT: 212.468.48001740 Broadway, New York, NY 10019www.dglaw.com

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