When it comes to raising money, the Jumpstart Our Business Startups (JOBS) Act seems to be getting the job done – for eligible companies.
But it would have a greater impact if more companies could take advantage of some of its streamlined provisions, such as the confidential filing of a draft IPO registration, reduced disclosure requirements and looser communication restrictions, the SEC was told Thursday at its 35th annual Government-Business Forum.
If the IPO on-ramp offered by the JOBS Act is working and not being abused, why should it be limited to emerging growth companies (EGCs), Stanley Keller, of Locke Lord LLP, wondered.
And why not let older EGCs, who were in the market before the act was implemented, take advantage of its provisions, asked David Feldman, of Duane Morris LLP. He also suggested opening the new Reg A+ route to companies outside of Canada and the U.S.
The potential to raise up to $50 million through Reg A+, along with its state Blue Sky exemption and the ability to "test the waters," is replacing the need for reverse mergers, Feldman said, and the Reg A+ path is easier than an IPO.
Prior to the JOBS Act, Regulation A was seldom used as a viable route for small companies, mainly because of its $5 million cap. In implementing the new Reg A+ rules last year, the SEC created two tiers. Tier 1 has a $20 million cap and limits offers by selling security-holders affiliated with the issuer to $6 million. The cap for Tier 2 is $50 million per 12-month period, with a $15 million limit on offers by selling security-holders affiliated with the issuer. (See BioWorld Today, March 26, 2015.)
While the SEC preempted state securities law registration and qualification requirements for Tier 2 offerings sold to qualified purchasers, it required companies using Tier 2 to submit audited financial statements, undergo SEC reviews and file ongoing semiannual and annual reports. To balance state and federal oversight, the SEC rules call for Tier 1 offerings, which don't have the ongoing disclosure requirements, to remain subject to both federal and state review.
Although the Reg A+ rules became effective in June 2015, many companies held off on pursuing that path due to the uncertainties raised by a legal challenge mounted by Massachusetts and Montana over the SEC's authority to preempt state review of the Tier 2 private offerings. Since that lawsuit was dismissed in April, the interest in Reg A+ is growing, with hundreds of millions of dollars being raised through the private offerings, Feldman said.
Meanwhile, crowdfunding, the last part of the JOBS Act to be implemented, is just beginning to open up. So far, community-based companies and services – or those that can bring their own crowd – seem to be benefiting the most from the new stream of capital formation, which carries a $1 million cap.
The experts comprising the forum's opening panel spoke glowingly of the opportunities the JOBS Act has created. More small companies are raising capital, engaging with both public and private investors, said Chris Tyrrell, founder and CEO of Offerboard Group. At the same time, more investors are entering the market, he noted, and angel investors have become more organized and compliant.
Challenges and uncertainty
However, there are challenges that need to be worked out. Although companies are permitted to test the waters with potential investors under the JOBS Act, "there's still a lot of uncertainty" about what kind of information they can share, said Jeffrey Vetter, of Fenwick & West LLP.
While Vetter was referencing IPOs, Feldman echoed the same concerns with Reg A+ and requested greater clarity on what constitutes testing-the-waters materials. For instance, he wondered how companies could attach a disclaimer to media interviews.
Another concern involved the dos and don'ts of combining the various public and private pathways, especially offerings conducted under Rule 506 of Regulation D. Integrating the paths has become more difficult and challenging, given the broad menu available, said Keller. "How do the pieces fit together?" he asked.
Several speakers also spoke to the need for educating entrepreneurs, companies and investors about the new pathways provided by the JOBS Act. "We're still educating Wall Street," Feldman said. But the word also needs to get out to the people on Main Street.