By Leslie McCallumThe new U.S. Jumpstart Our Business Startups Act (JOBS Act) will make it easier for small and medium-sized companies to go public in the United States. The JOBS Act also significantly reforms the rules governing private offerings. Notably, most of its provisions apply to both U.S. and non-U.S. companies raising capital in the United States.
Offerings by Emerging Growth Companies
The JOBS Act creates a new category of issuers called emerging growth companies (EGCs). These are companies that are not yet public in the United States and that have total annual gross revenue of less than US$1 billion. An EGC may maintain this status for five years following its initial public offering in the United States unless its market capitalization exceeds US$700 million or it issues more than US$1 billion in non-convertible debt in a three-year period.
A Canadian company whose revenue, market capitalization and debt are below the relevant thresholds can qualify as an EGC, and the benefits of this status may be particularly appealing to those seeking to go public in the United States that do not qualify for the Canada-U.S. Multijurisdictional Disclosure System (MJDS). The benefits available to EGCs under the JOBS Act include the following:
EGCs and dealers acting on their behalf will be able to "test the waters" for a public offering by communicating with qualified institutional buyers (QIBs) and other accredited investors before a registration statement is filed. This is similar to Canadian regulators’ recent proposal to permit testing the waters in IPOs, but the JOBS Act provision applies to any public offering by an EGC. Moreover, the U.S. rule would permit communication with a substantially broader group of potential investors.
EGCs will have relaxed prospectus disclosure requirements – for example, they will need to provide only two years of audited annual financial statements and MD&A rather than three years. And instead of providing five years of selected financial data, they need only provide such data for the lesser of five years and the number of years for which they have presented audited annual financial statements in filings with the SEC.
EGCs will be able to file an IPO registration statement confidentially with the SEC. This accommodation, which is currently limited to non-U.S. companies listed or being listed on a non-U.S. stock exchange, allows complicated disclosure issues to be resolved before an offering becomes public and minimizes the business and reputational harm associated with cancelling an offering if market conditions deteriorate. Under the JOBS Act, the offering will have to be made public at least 21 days before a road show.
The JOBS Act provides greater freedom for analysts to publish research reports about EGCs, even when their firm is participating in an offering; it also allows analysts to attend meetings with underwriters and management of an EGC.
EGCs will be exempt from the U.S. "say-on-pay" requirements, will have relaxed executive compensation disclosure requirements and will not have to provide an auditor’s attestation of their internal controls.
As a result of these JOBS Act reforms, there will be two different IPO processes in the United States, one for EGCs and one for non-EGCs, as well as reduced reporting obligations for EGCs for up to five years after an IPO. While foreign private issuers already have the benefit of certain modified SEC rules and eligible Canadian companies have the benefit of the MJDS, the JOBS Act creates a new, potentially advantageous way of going public and fulfilling the SEC’s ongoing reporting obligations.
Private Placement Reforms
The JOBS Act requires the SEC to remove the prohibitions on general solicitation and advertising relating to private placements to qualified institutional buyers (under Rule 144A) and accredited investors (under Rule 506 of Regulation D). For Canadian issuers, this change will result in greater marketing flexibility when conducting a private placement in the United States in conjunction with a Canadian public or private offering.
The JOBS Act also requires the SEC to create a new exemption from registration for public offerings of securities not exceeding US$50 million in any 12-month period. Securities issued under this exemption will be freely tradable. However, unlike traditional private placements to accredited investors, these offerings will attract prospectus-level liability, and certain disclosure and filing obligations will apply.
Another registration exemption under the JOBS Act is the "crowdfunding" exemption for private companies. Unlike the other reforms, this exemption is available only to U.S. companies, permitting them to make public offerings of up to US$1 million per 12-month period, with a limit of US$100,000 per investor. These offerings will have to be made through a registered broker or a neutral online funding portal. Issuers, brokers and funding portals will be subject to certain disclosure and investor protection requirements, and the securities will be subject to resale restrictions for one year.
SEC Registration by Private Companies
Under Section 12(g) of the U.S. Securities Exchange Act of 1934, issuers are generally required to register their securities with the SEC and comply with U.S. public company reporting obligations if they have assets greater than US$10 million and their equity securities are held by 500 or more shareholders. The JOBS Act raises this registration threshold to 2,000 shareholders or 500 shareholders who are not accredited investors. Moreover, shareholders who receive securities in exempt transactions under employee compensation plans are excluded from the count. The JOBS Act does not affect the existing Section 12(g) exemptions for foreign private issuers whose securities are held by fewer than 300 U.S. residents or whose securities do not trade on a U.S. national stock exchange or the OTC bulletin board.