232 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
to provide information to investors, reduce the risk of fraud, and, where
required under the Act, ensure that investors and issuers satisfy the require-
ments outlined in Title III of the JOBS Act.
The JOBS Act requires these intermediaries to, among other things:
◾ provide disclosures that the SEC determines appropriate by rule, includ-
ing regarding the risks of the transaction and investor education materials
◾ ensure that each investor: (1) reviews investor education materials;
(2) positively afrms that the investor understands that the investor is
risking the loss of the entire investment, and that the investor could
bear such a loss; and (3) answers questions that demonstrate that the
investor understands the level of risk generally applicable to invest-
ments in startups, emerging businesses, and small issuers and the risk
of illiquidity
◾ take steps to protect the privacy of information collected from investors
◾ take such measures to reduce the risk of fraud with respect to such
transactions, as established by the SEC, by rule, including obtaining
a background and securities enforcement regulatory history check on
each ofcer, director, and person holding more than 20% of the out-
standing equity of every issuer whose securities are offered by such
person
◾ make available to investors and the SEC, at least 21 days before any
sale, any disclosures provided by the issuer
◾ ensure that all offering proceeds are only provided to the issuer when
the aggregate capital raised from all investors is equal to or greater than
a target offering amount, and allow all investors to cancel their commit-
ments to invest
◾ make efforts to ensure that no investor in a 12-month period has pur-
chased crowdfunded securities that, in the aggregate, from all issuers,
exceed the investment limits set forth in section Title III of the JOBS Act;
plus any other requirements that the SEC determines are appropriate
11.6 Funding Portals
Title III of the JOBS Act adds new Section 3(h) to the Exchange Act, which
requires the SEC to exempt, conditionally or unconditionally, an intermedi-
ary operating a funding portal from the requirement to register with the SEC
as a broker.
Meet the JOBS Act ◾ 233
The intermediary, though, would need to register with the SEC as a fund-
ing portal and would be subject to the SEC’s examination, enforcement, and
rulemaking authority. The funding portal also must become a member of
a national securities association that is registered under Section 15A of the
Exchange Act.
A funding portal is dened as a crowdfunding intermediary that does not:
(1) offer investment advice or recommendations; (2) solicit purchases, sales, or
offers to buy securities offered or displayed on its website or portal; (3) com-
pensate employees, agents, or other persons for such solicitation or based on
the sale of securities displayed or referenced on its website or portal; (4) hold,
manage, possess, or otherwise handle investor funds or securities; or (5)
engage in such other activities as the SEC, by rule, determines appropriate.
The JOBS Act directs the SEC to adopt rules to implement Title III within
270 days of enactment of the Act. The President signed the JOBS Act into
law on April 5, 2012.
11.6.1 Restrictions on Funding Portals
The JOBS Act imposes several restrictions on the activities of a registered
funding portal. A funding portal is not permitted to:
◾ provide investment advice or make recommendations
◾ solicit purchases, sales, or offers to buy the securities offered or dis-
played on its website or portal
◾ compensate employees, agents, or other persons for such solicitation or
based on the sale of securities displayed or referenced on its website
or portal
◾ hold, manage, possess, or otherwise handle investor funds or securities
◾ engage in any other activities the SEC determines to prohibit in its
crowdfunding rulemaking
In addition, each funding portal and each crowdfunding broker is prohib-
ited from:
◾ compensating promoters, nders, or lead generators for providing the inter-
mediary with the personal identifying information of any potential investor
◾ allowing its directors, ofcers, or partners (or any person occupying a
similar status or performing a similar function) to have a nancial inter-
est in any issuer using the services of the intermediary
234 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
11.7 Mini-IPOs
The Act also makes it easier for a company to raise a more substantial amount
of capital without becoming an SEC reporting company by amending Section
3(b) of the Securities Act to exempt from registration any class of equity, debt,
or convertible debt securities sold in an offering where the aggregate offering
amount in any 12-month period does not exceed $50 million. This assumes
that the issuer les audited nancial statements each year following the offer-
ing and complies with any other rules to be developed by the SEC.
This amendment effectively expands the existing exemption under
Regulation A, which allows a private company to raise up to $5 million from
the public using a more streamlined disclosure than a typical PO and without
registering the offering with the SEC or becoming an SEC reporting company.
11.8 Emerging Growth Company IPOs
Last, the JOBS Act makes it easier for EGCs to raise capital in the public mar-
kets by exempting them from a number of current and proposed regulations
applicable to companies contemplating an IPO, and once they are public.
The idea is to stimulate the economy by offering edgling companies a rela-
tively easy entry into the IPO thruway.
An EGC is dened as any issuer that had total annual gross revenues of
less than $1 billion in the last scal year. An EGC retains that status for up to
ve years after its IPO (it may lose that status earlier if revenues reach more
than $1 billion, if it issues more than $1 billion in debt, or oats more than
$700 million in stock). Companies that went public before December 8, 2011
do not qualify for EGC status.
6
Under the JOBS Act, EGCs would have to report only two years of
audited nancial statements when they go public (as opposed to three years
for income statements, and ve years for select nancial data under current
law). Underwriters participating in an EGC’s IPO are able to issue research
reports on the EGC’s stocks ahead of offerings, a practice that is currently
prohibited. Additionally, EGCs will be exempt from certain disclosure
requirements regarding executive compensation.
The bill received bipartisan support, passing with a 390 to 23 vote in
the House of Representatives. Supporters believe the bill targets rules that
are impediments to growth, and makes it easier for young companies to
raise capital and conduct IPOs. In a March 7 Senate Hearing, Senator Chuck
Meet the JOBS Act ◾ 235
Schumer specically cited the “drastic decline” in U.S. IPOs since the 1990s
as a driving force behind the bill.
Critics also worry about loosening restrictions on the ability for under-
writers to publish research reports about an issuer it is representing. After
the dot-com boom, where analysts touted tech stocks that turned out to be
bad investments, regulators believed that those analysts were inuenced by
their investment banking colleagues who were seeking to win business from
those issuers. Sarbanes-Oxley aimed to reduce the inuence of bankers on
equity research, and critics fear that a rollback could have severe conse-
quences for investor protection.
11.8.1 Relief for EGCs
As we have seen, the JOBS Act created a new category of EGCs, and pro-
vided various forms of relief aimed at making it easier for these companies to
undertake IPOs.
7
An EGC is dened as any issuer that had total annual gross
revenues of less than $1 billion during its most recently completed scal year,
other than a company that completed its IPO on or before December 8, 2011.
An EGC retains that status until the earliest of:
◾ the last day of the scal year during which it had total annual gross
revenues of $1 billion or more
◾ the last day of the scal year following the fth anniversary of the
issuer’s IPO
◾ the date on which the issuer has, during the previous three-year period,
issued more than $1 billion in non-convertible debt
◾ the date on which the issuer is deemed to be a “large accelerated
ler,” as dened in Rule 12b-2 under the Exchange Act (i.e., has been a
reporting company for 12 months, has led at least one annual report,
and has a market value of equity securities held by non-afliates of
$700 million or more as of the most recently completed second scal
quarter).
◾ the $1 billion annual gross revenue threshold is to be adjusted for ina-
tion every ve years
The JOBS Act also exempts EGCs from the following additional compen-
sation-related disclosure provisions that were imposed on U.S. public compa-
nies pursuant to the Dodd-Frank Act:
236 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
◾ the advisory “say-on-pay” vote on executive compensation required
under Section 14A(a) of the Exchange Act
◾ the Section 14A(b) requirements relating to shareholder advisory votes
on golden parachute compensation
◾ the Section 14(i) requirements for disclosure relating to the relationship
between executive compensation and nancial performance of the issuer
◾ the requirement of Dodd-Frank Act Section 953(b)(1), which will require
disclosure as to the relationship between CEO and median employee
pay
11.8.2 Condential Filing Process
Under the JOBS Act, the SEC is required to permit EGCs to submit draft
IPO registration statements on a condential basis. The ability to le on
a condential basis could benet many issuers by allowing them to delay
disclosure of competitive or otherwise sensitive information until the
issuer is reasonably sure that its IPO will proceed as planned. The ability
to le on a condential basis can also stave off the embarrassment often
associated with the withdrawal of a registration statement due to lack of
investor interest.
8
Under the new condential ling process, the condential draft registra-
tion statement submitted to the SEC must be “substantially complete” and
must include a signed audit report and exhibits, but does not need to be
signed by the issuer or include an auditor consent. The submission of a con-
dential draft registration statement is not deemed a ling for most purposes
under the Securities Act unless and until the registration statement is led
on a non-condential basis, although such ling may trigger certain ling
requirements for FINRA purposes. Although an issuer is prohibited from
publicly announcing the fact that a condential submission has been made,
it is allowed to inform Qualied Institutional Buyers (QIBs) and Institutional
Accredited Investors (IAIs) of such submissions pursuant to the “testing-
the-waters” communications discussed next. An issuer is also permitted to
publicly announce its intention to engage in a public offering.
The registration statement does not need to be publicly led until
21 days prior to the rst roadshow, or 21 days before anticipated effec-
tiveness of the registration statement, if no road show is to be held.
Communications with QIBs and IAIs under the test-the-water provisions of
the JOBS Act will not be deemed to constitute road shows. Upon the initial
ling of a registration statement on a non-condential basis, all previously
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