The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.
The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was "an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support." President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
The purpose of the bill is to provide mechanisms for small businesses to raise capital more easily and efficiently, which proponents say would promote the creation of more jobs. The bill will allow companies to conduct initial public securities offerings while being exempt from certain financial disclosures and governance requirements for up to five years. Some of the regulations that will not apply to companies with up to $1 billion in annual revenue for five years include: (1) the requirement to hire an independent outside auditor to attest to a company's internal financial controls, and (2) restrictions on how financial analysts interact with investment bankers to promote a company's stock.
The JOBS Act will also allow businesses to use crowdfunding, which allows entrepreneurs to raise equity capital from large pools of small investors. Businesses will be able to solicit equity investments through the internet and any other medium without being subject to the Securities and Exchange Commission's (SEC) restrictions on using advertising to solicit new investors. The exemption will apply to businesses that are seeking to raise $1 million or less where investors are limited in their annual investments to: (1) the greater of $2,000, or 5%, of an investor's annual income or net worth for investors with an annual income or net worth of less than $100,000 and (2) the lesser of $100,000, or 10%, of an investor's annual income or net worth for all other investors.
In addition, small private companies will be able to sell up to $50 million in shares in a 12-month period as a Regulation A offering, under certain conditions, an increase from the current $5,000,000 limitation.
Democrats in the Senate would not pass the bill unless the crowdfunding provision had additional safeguards to protect investors. The Senate changes provide that companies using crowdfunding:
- Must still file basic information with the SEC such as the names of the directors, officers, holders of more than 20% of the company's shares, the description of the business, and its financial condition;
- Must provide tax returns and a financial statement certified by a company principal if raising $100,000 or less;
- Must provide financial statements that are reviewed by an independent accountant if raising between $100,000 and $500,000; and
- Must provide audited financial statements if raising more than $500,000.
In addition, intermediaries seeking to help companies raise money must register with the SEC. Rules specifying the regulatory details of crowdfunding must be issued by the end of 2012.
Critics of the bill, especially Democrats who opposed it, are concerned that this level of deregulation will open the door for more fraud. Representative Patrick McHenry (R-NC) responded to this criticism by stating, "We don't want any fraud in this space because fraud will prevent more people from participating. You can have crowdfunding take place with minimal amounts of fraud."
Page Perry, LLC provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.