On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act includes amendments to both the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) that significantly impact public company registration, periodic reporting, and other regulatory requirements for banks and bank holding companies. The JOBS Act includes modifications designed to facilitate access by private companies to capital in the U.S., as well as reforms to the initial public offering process. This alert focuses on provisions of the JOBS Act that are most applicable to banks and bank holding companies, including the increase in the thresholds that require public company registration and permit deregistration with the SEC, the creation of a new class of issuer (the emerging growth company) that is subject to a more streamlined IPO process and less stringent disclosure requirements, and the expansion of Regulation A of the Securities Act to increase the offering amount for certain exempt small issues. The provisions of the JOBS Act discussed below apply to all companies, not just banks and bank holding companies (although there are separate registration and deregistration thresholds applicable to non-bank and non-bank holding company issuers).
The JOBS Act will have the greatest impact on banks and bank holding companies with fewer than 2,000 shareholders and with annual gross revenues of less than $1 billion; however, additional provisions will benefit a broader range of companies.
The JOBS Act raises the threshold that triggers registration with the SEC under Section 12(g) of the Exchange Act based on the number of shareholders of record of a bank or bank holding company. Pursuant to Title VI of the JOBS Act, a bank or bank holding company will now be required to register only when it has more than $10 million in assets and a class of its equity securities is held of record by 2,000 or more persons. Prior to enactment of the JOBS Act, Section 12(g) of the Exchange Act required a bank or bank holding company to register with the SEC if it had more than $10 million in assets and a class of its equity securities was held of record by 500 or more persons. The increased threshold is effective immediately without further action by the SEC.
The JOBS Act also amends the Exchange Act to raise the threshold that permits deregistration for banks and bank holding companies from 300 shareholders of record to 1,200 shareholders of record. As a result, some banks and bank holding companies may consider the cost benefits of deregistering or “going dark.” The amendments that increase the threshold to permit deregistration are effective immediately, and the JOBS Act requires the SEC to issue final regulations to implement these amendments within one year of enactment of the JOBS Act.
The JOBS Act further amends the Exchange Act to revise the definition of “held of record” to exclude persons who received securities pursuant to an employee compensation plan in transactions exempt from the registration requirements of Section 5 of the Securities Act. The JOBS Act requires the SEC to adopt safe harbor provisions that issuers may follow when determining whether holders of their securities received such securities pursuant to an employee compensation plan in a transaction exempt from registration.
Emerging Growth Companies
Title I of the JOBS Act amends the Securities Act and the Exchange Act to create the emerging growth company (“EGC”) as a new category of issuer. An EGC includes any issuer that had total annual gross revenues of less than $1 billion (indexed for inflation) during its most recently completed fiscal year, other than an issuer that completed an initial public offering on or prior to December 8, 2011. All EGCs will be granted the option to pursue a streamlined IPO process and, following completion of the IPO, will have up to five years to achieve full compliance with certain disclosure regulations and accounting and auditing standards that are currently applicable to all U.S. public companies.
During this “IPO on-ramp” period, an EGC will be permitted the following exemptions from, or modifications of, currently-required disclosures and accounting and auditing standards.
- Audited Financial Statements and MD&A – An EGC will be required to provide only two years of audited financial statements in its IPO registration statement rather than the three years currently required (and the management’s discussion and analysis of financial condition and results of operations need only cover two years). Additionally, an EGC will not need to present selected financial data for any period prior to the earliest audited period presented in its IPO registration statement.
- Application of New Accounting Standards – EGCs will not be subject to any newly adopted or revised accounting standards until such standards are deemed to apply to companies that are not “issuers” within the meaning of the Sarbanes-Oxley Act of 2002.
- Internal Controls Audit Attestation – EGCs will be exempt from the requirement that an independent registered public accounting firm attest to an issuer’s internal controls over financial reporting.
- Audit Firm Rotation – EGCs will be exempt from any future mandatory audit firm rotation requirement and any rules requiring that auditors provide additional information about the audit or financial statements of the issuer that the Public Company Accounting Oversight Board may adopt.
- Executive Compensation – EGCs will have the option of complying with disclosure requirements applicable to smaller reporting companies with respect to executive compensation.
- Say-on-Pay; Frequency of Say-on-Pay; Golden Parachute Exemption – EGCs will be exempt from the requirement that issuers seek shareholder approval of an advisory vote on executive compensation arrangements, including golden parachute compensation.
- Investor and Analyst Communications – EGCs will have a greater ability to communicate with certain potential investors (qualified institutional buyers or institutional accredited investors) with respect to offerings of securities. Analysts will also have an increased ability to communicate with management, including attending meetings with management in certain instances.
- Confidential Registration Statements – EGCs will be permitted to submit IPO registration statements and subsequent registration statements for SEC review on a confidential basis, so long as a public filing is made at least 21 days prior to the roadshow for the public offering.
An EGC would retain its status as such until the earliest of (a) the first fiscal year after its annual revenue exceeds $1 billion, (b) the first fiscal year following the fifth anniversary of its IPO, (c) the date when the company has issued more than $1 billion in non-convertible debt securities (over the previous three-year period), and (d) the first fiscal year in which the company becomes a large accelerated filer.
A company may choose to forgo any of the exemptions provided to EGCs under the JOBS Act and instead comply with the requirements applicable to non-EGCs. However, if an EGC elects to comply with the timing requirements that apply to non-EGCs with respect to new and revised accounting standards, it must make such election at the time the company is first required to file a registration statement or report with the SEC and must continue to comply with such standards for as long as the company remains an emerging growth company.
Expansion of Regulation A
The JOBS Act creates a new exemption under Section 3(b) of the Securities Act, which will be implemented by rule to be adopted by the SEC, to permit offerings of up to $50 million in aggregate offering amount in any 12-month period, as compared to the current $5 million limitation under Regulation A. The amendment requires an issuer that relies on the exemption to file audited financial statements with the SEC annually and permits the SEC to include other terms, conditions, or requirements in connection with such offerings that the SEC determines to be necessary for the public interest and for the protection of investors. The JOBS Act also permits the SEC to adopt a rule or regulation requiring the issuer to make available to investors and file with the SEC periodic disclosures regarding the issuer, its business operations, financial condition, corporate governance principles, and use of investor funds and other appropriate matters.
BABC Attorneys Involved in Legislation
During the drafting of the JOBS Act, members of BABC’s Corporate and Government Affairs practice groups met with staff for the House Financial Services Committee to discuss certain aspects of the Act. BABC attorneys provided their input on ways to generate additional capital investment and other aspects of the legislation. The members of the BABC Government Affairs practice group provide advocacy services at the federal, state, and local levels. Our members routinely work on legislation, such as the JOBS Act, and regulations for our clients. If you have questions about our Government Affairs Practice Group, please contact David Stewart (205-521-8368) or email@example.com.