By: Michael Psathas
On July 17, 2018, the United States House of Representatives overwhelmingly passed a bipartisan package of reforms to help facilitate capital formation and spur entrepreneurship. The JOBS and Investor’s Confidence Act (JOBS Act 3.0) is a compilation of 32 individual bills that is intended to ease regulatory burdens for smaller and mid-sized companies raising capital. In addition, the legislation would require the Securities and Exchange Commission (SEC) to conduct various studies of current regulations to assess the costs and benefits of such regulations. While the JOBS Act 3.0 appears to garner bipartisan support in Washington, it is unclear whether the United States Senate will hold a vote on the legislation prior to the midterm elections in November.
The JOBS Act 3.0 (as written) contains important implications that will affect issuers and investors including the following:
- Accredited Investor Definition: The JOBS Act 3.0 expands the definition of “Accredited Investor” for private offerings to account for certain educational and professional expertise. The new definition would therefore include natural persons who hold securities-related licenses and those who have qualifying education or job experience without regard to net worth and income. The definition would also be expanded to include family offices and family clients as defined under the Investment Advisers Act of 1940.
- Demo Days: A new statutory definition for groups of accredited investors would be created – “angel investor groups” – that would be permitted to sponsor “Demo Days” whereby startups could pitch investors without violating securities laws. Nonprofit organizations as well as colleges would also be permitted to sponsor Demo Days.
- Venture Exchanges: The Exchange Act would be amended to provide for “Venture Exchanges,” a venue where securities could trade for small and emerging companies. The issuer would not, however, be permitted to concurrently trade on a national securities exchange.
- Confidential Review/ Testing the Waters: The JOBS Act 3.0 would expand certain provisions of the initial JOBS Act of 2012 to permit all public companies, not just Emerging Growth Companies (EGCs), to confidentially submit draft registration statements for IPOs to the SEC. In addition, all public companies (not just EGCs) would be permitted to gauge investor appetite for an offering through “testing the waters” communications prior to filing a registration statement for an IPO.
- IPO Study for Small and Mid-Sized Companies: The JOBS Act 3.0 would require the SEC to study the costs and expenses associated with companies consummating an IPO. The results of the study would be used to create and implement recommendations to amend the IPO process.
- Quarterly Report (10-Q) Study: Similar to the study with respect to the IPO market, the JOBS Act 3.0 would require the SEC to study the costs, expenses and related benefits of the quarterly reporting – with a particular focus on EGCs.