The JOBS Act

Background

The Jumpstart Our Business Startups (JOBS) Act was passed by Congress on March 27, 2012 and was signed into law by President Obama the following week. This legislation relaxes important investor protections implemented in response to major financial scandals such as Enron and WorldCom. It dilutes reforms enacted as part of the Dodd-Frank Act in response to the 2008 financial crisis. It also eases already lax restrictions on private placements and legalizes so-called “crowdfunding” securities transactions (over which the SEC was given broad rulemaking authority).

The implications of the JOBS Act, in particular preemption of state law over crowdfunding, may have far-reaching, detrimental consequences to Main Street investors and the U.S. public. Below is a summary of the five titles of greatest concern to state securities regulators.

Title I: Reopening American Capital Markets to Emerging Growth Companies

Allows all but the very largest companies direct access to capital from unaccredited retail investors without being required to provide the usual types of financial and risk disclosures applicable to public reporting companies.

Why NASAA is Concerned: Rolling back these requirements and exempting all but the largest companies from SOX auditing requirements will hinder investors’ ability to receive reliable financial information.

Title II: Access to Capital for Job Creators

Allows, under Rule 506 of Regulation D, the general solicitation of, and widespread advertising to, all investors (including non-accredited investors), so long as the actual sale is made to accredited investors.
Allows, under Rule 144A, the general solicitation of, and widespread advertising to, persons other than qualified institutional investors, so long as the actual sale is made to qualified institutional investors.
Exempts from registration as a broker or dealer any person acting as an intermediary for Rule 506 offerings.

Why NASAA is Concerned: Allowing general solicitation and widespread advertising to all investors, particularly with respect to Rule 506 offerings, may lead to increased investor abuse. Intermediaries relying on this exemption may be subject to recurring conflicts of interest among themselves, issuers and investors and may improperly promote certain offerings over others.

Title III: Capital Raising Online While Deterring Fraud & Unethical Non-Disclosure (CROWDFUND)

Creates a new exemption under the Securities Act to facilitate the practice of “crowdfunding” in which securities are publicly sold in small amounts to a large number of small investors.
Establishes an aggregate annual offering cap per issuer of $1 million, and an individual annual investment cap, per issuer, of (a) the greater of $2,000 or 5% of annual income or net worth if the investor has less than $100,000 in income or net worth, or (b) 10% of annual income or net worth, not to exceed $100,000, if an investor has at least $100,000 in income or net worth.

Why NASAA is Concerned: Securities sold in reliance upon the crowdfunding exemption are given the status of “covered securities,” so states retain only antifraud authority. States also retain antifraud authority over funding portals but are otherwise prohibited from regulating them, provided they comply with federal requirements.

Title IV: Small Company Capital Formation

Raises the offering limit from $5 million to $50 million in any 12-month period for non-public companies using an exemption from registration under SEC Regulation A or a new similar exemption.

Title V: Private Company Flexibility and Growth

Raises the shareholder threshold for triggering mandatory registration under Section 12(g) of Securities Exchange Act of 1934 from 500 to 2,000 shareholders (or 500 unaccredited shareholders). An issuer must continue to have total assets exceeding $10 million in order to meet the mandatory registration threshold.

Why NASAA is Concerned: The increased threshold allows more private companies to avoid becoming public reporting companies and to rely on exemptions (e.g., Rule 506 of Regulation D) from registration when issuing shares.

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Issue Focus:

The JOBS Act