The SEC Commissioners voted unanimously on June 28, 2018 to expand the definition of “smaller reporting company.” This change has been requested as a key recommendation for a number of years at the annual SEC small business conference. Companies with SRC status have somewhat relaxed disclosure and reporting obligations, such as providing two rather than three years of financial information, as well as relief from some of the more costly aspects of the Sarbanes-Oxley Act of 2002. The change is effective 60 days after publication in the Federal Register, which should happen fairly soon.
The revised definition raises the value of a company’s public float to qualify as an SRC from $75 million to $250 million. If a company does not have public float (such as at the time of its IPO), it previously was an SRC unless revenues exceeded $50 million. The new rule says any company is an SRC if it has less than $100 million in revenues and either no public float or a public float of less than $700 million.
Many of the benefits of SRC status also are available if the company is an “emerging growth company” under the Jumpstart our Business Startups (JOBS) Act of 2012. Those are generally companies with less than $1.07 billion in revenues who had not completed an SEC registration of securities prior to passing the JOBS Act. EGC status, however, is terminated over time.
They got tucked into a transportation bill (Fixing America’s Surface Transportation Act or the FAST Act), but with a deft set of amendments the Reforming Access for Investments in Startup Enterprises Act of 2015 (or the RAISE Act) and other small business initiatives were signed by the President on December 4, 2015 and are now law. The new law also includes a direction to the SEC to change Form S-1 to allow forward incorporation by reference in filings by smaller reporting companies. This is a big and positive change for companies not eligible to use short form registration on Form S-3.
The RAISE Act assures an exemption from SEC registration for a resale of a security to an accredited investor who has access to certain information from the company, no bad actors or shells allowed, no general solicitation or advertising, no start-up companies and the class of stock being sold has to have existed for at least 90 days. This eliminates the old awkward invented Securities Act Section 4(1-1/2) exemption which was used in practice and accepted by the SEC but actually nowhere in the statute. This could help add comfort to secondary market folks who help people buy pre-IPO stocks like Facebook and Twitter before they go public. It could also help PIPE (private investment in public equity) investors who wish to transfer their shares more confidently in a private transaction before they would otherwise be eligible to sell the shares publicly.
Other very exciting changes in the law:
- mandating the SEC look to ease disclosure burdens on smaller companies, to study ways to improve and simplify disclosure rules, and reduced disclosure for emerging growth companies.
- lengthening the time you can keep your IPO filing confidential under the JOBS Act to 15 days before the first road show (from 21 days)
- permitting a JOBS Act IPO filing to exclude financials that are likely to go stale by the time of the actual offering.
- allowing an emerging growth company to still be treated like one through its JOBS Act IPO even if it stops being an EGC during the process.
Thanks House Financial Services Committee for pushing these through the “I’m Just a Bill” process!
After years of (perhaps excessive) regulation aimed at promoting transparency and accountability, the JOBS Act, signed by the President and overwhelmingly passed by Congress, undoes many of these requirements for companies that have the least experience in providing appropriate information upon which an investor can base its investment decision. It may also open the gateway for investors who arguably aren’t armed with the financial knowledge to protect themselves – they may just put it all on red and let it ride.
Continue reading Give Us Your Tired, Your Poor, Your Companies Seeking Capital… The JOBS Act: A New Path to Prosperity or an Opening for Securities Fraud?