In the last several years, beginning with the 2012 Jumpstart Our Business Startups Act (the JOBS Act), Congress and the Securities and Exchange Commission have taken steps to allow startups and other initial stage businesses to raise capital more easily in order to encourage increased economic activity and jobs.
The JOBS Act provided incentives for smaller companies to go public. Title I of the JOBS Act created a category of issuer called “emerging growth companies” (EGCs), which reduced burdensome compliance requirements for a limited period. An EGC must have total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. A company continues to be an emerging growth company for the first five fiscal years after it completes an IPO, subject to certain exceptions. unless one of the following occurs.
The JOBS Act also focused on incentives for private capital formation. Title II permits general solicitation and advertising, of certain unregistered offerings, which had been prohibited, under SEC Regulation D, Rule 506(c). Title III permits an exemption from the registration requirements of the Securities Act of 1933 for crowdfunding. Crowdfunding can be used by companies to access small investors on certainly qualified platforms. Title IV created what is now known as Regulation A+, which provides for an offering reviewed by the SEC that can be sold publicly without complying with Securities Act registration requirements. Title V changed the threshold for requiring registration of a class of securities under Section 12(g) of the Securities Act from 500 or more persons to either:
- 2,000 or more persons or
- 500 or more persons who are not accredited investors
I have examined various statistics relating to the results of some of these changes, all of which changes and their consequences have been widely debated since they were enacted. They appear to have been successful to some extent, though their acceptance has come slowly. While I appreciate the actual and potential impact of these changes, I believe that capital continues to be raised for the most part by companies in their initial stages in a traditional, very personal way, face-to-face, one investor at a time. But that will surely change as the JOBS Act and its regulatory changes become more popular and, of course, as there are further changes in the laws and regulations governing the sale of securities.