A Critical Look at THE JUMPSTART OUR BUSINESS STARTUPS ACT
Salzsieder, Leigh, Cornell, David W., The CPA Journal
Considering the Debate Surrounding Its Provisions and implications
The Jumpstart Our Business Startups (JOBS) Act (H.R. 3606), which was signed into law on April 5, 2012, enjoyed bipartisan support in the U.S. House of Representatives and in the U.S. Senate, but its provisions generated some controversy and will have significant implications for many capital market participants. The JOBS Act works to increase access to capital by scaling back new regulations and modifying old regulations through three main mechanisms: the initial public offering (IPO) "on-ramp," crowdfiinding, and mini-public offerings. It affects an extensive list of laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, Regulation FD (Fair Disclosure), the Sarbanes-Oxley Act of 2002 (SOX), and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Furthermore, the law will exempt a new class of filer- emerging growth companies (EGC)-from certain future rules.
Although there is no disagreement about the need to create jobs, there is significant dispute over which policies are most likely to make that happen. Proponents of the JOBS Act assert that it updates old regulations that have failed to keep up with the modem economy and reverses regulations that have focused too heavily on large business, leaving smaller businesses burdened with onerous regulations that hinder their ability to access capital. But the fundamental question surrounding the JOBS Act is whether previous regulations were actually preventing profitable small businesses from acquiring capital. The act implicitly takes the position that 1) prior regulations were preventing companies from accessing capital, 2) the inability of these companies to access capital is hurting job growth, and 3) the way to stimulate job growth is to remove certain regulations surrounding the process of offering and selling securities.
The process of offering and selling securities in the United States has long been regulated. These regulations have evolved over decades in order to balance business' need to access capital with investors' need for relevant and reliable disclosures. Historically, significant changes to these regulations have occurred only after a scandal has caused massive investor losses. For example, corporate insiders' abuse of the financial markets and the resulting stock market crash of 1929 lead to the Securities Acts of 1933 and 1934. More recently, the failure of Enron and the global credit crisis led to SOX and the Dodd-Frank Act.
The JOBS Act is different because it did not result from investor losses due to abuse; rather, it resulted from a major economic recession. The act is also unique because, unlike previous regulatory changes, it actually unwinds many of the investor protections put into place over the last 80 years, including parts of the Securities Acts, SOX, and the Dodd-Frank Act.
Provisions of the JOBS Act
As previously mentioned, the JOBS Act works to facilitate private companies' access to capital by scaling back new regulations and modifying old regulations through the IPO on-ramp, crowdfunding, and mini-public offerings. The Exhibit summarizes the act's main provisions; the sections below delve deeper into each of these three mechanisms and the act's implications for CPAs.
Prior to the JOBS Act, SEC regulations established three distinct classes of filers: 1) nonaccelerated filers with public float of less than $75 million, 2) accelerated filers with public float of $75 million to $700 million, and 3) large accelerated filers with float in excess of $700 million. The JOBS Act creates a new classification of filer-the EGC. It is important to note that entities must elect EGC treatment; if a filer does not elect to be treated as an EGC, it will be treated as either a nonaccelerated filer or an accelerated filer. To be eligible for EGC status, companies must have had less than $1 billion of revenue in their most recent fiscal year and cannot have completed an IPO on or before December 8, 2011. …