JOBS Act Analysis: Reduced Disclosure Requirements for IPOs (2nd in a Series)

President Obama signs the Jumpstart Our Business Startups Act

President Obama signs the Jumpstart Our Business Startups (JOBS) Act April 5, 2012

The JOBS Act (formally, the “Jumpstart Our Business Startups Act“) was designed to facilitate raising capital by reducing regulatory burdens. Specifically, the Act creates a separate class of issuers under the U.S. Securities Act of 1933 and the Exchange Act of 1934 for “emerging growth companies.” Emerging growth companies, you will recall, were defined as issuers with annual gross revenues of less than $1 billion and a public float of less than $700 million.

These companies, when going public, are now exempt from some of what have been viewed as the more onerous accounting and disclosure requirements previously applicable to all public companies. This was done by amending the Securities Act, the Exchange Act, and Sarbanes-Oxley to provide for reduced reporting requirements (i) in Initial Public Offering (IPO) registration statements and (ii) for a period of up to five years after an emerging growth company’s IPO.

Which Rules Are Relaxed

Emerging growth companies will now be:

  • Permitted to communicate with accredited investors and qualified institutional buyers in advance of potential IPOs, as well as follow-on, secondary public offerings
  • Able to involve research analysts more freely in the IPO process by permitting research to be published during the period immediately following the IPO
  • Able to file an IPO registration statement with the SEC on a confidential basis, provided that the registration statement is filed publicly within 21 days of the commencement of the road show
  • Exempt from auditor attestation on internal control assessments under Sarbanes-Oxley Section 404(b) and
  • Exempt from certain compensation disclosure requirements along with Dodd-Frank Act’s “say-on-pay” shareholder voting.

Other benefits for emerging growth companies going public will include relaxed financial disclosure, accounting, and auditing requirements, such as:

  • Needing to disclose only two years of audited financial statements (rather than three)
  • No mandatory disclosure of selected financial data for periods before those periods presented in its financial statements
  • A grace period with respect to certain new or revised financial standards
  • An exemption from Public Company Accounting Oversight Board rules adopted after the date of enactment of the JOBS Act.

Speeding the Path to IPOs

By significantly reducing the costs of emerging growth companies going public (and later complying with public company rules and regulations), with the ability to file a registration statement on a confidential basis while enhancing flexibility in communicating with potential investors prior to an IPO, smaller companies are being encouraged to “test the waters” without disclosing confidential information or suffering adverse publicity should their IPOs be cancelled or delayed. This means that the JOBS Act may stimulate emerging growth companies to go public sooner in order to take advantage of the other benefits of being a public company, i.e., investor and employee liquidity, the availability of capital for acquisitions, and favorable publicity.

Liability Rules Not Relaxed

But it is important to note that there has been no direct relaxation of any of the liability rules for public companies. So, for example, if a weakness in internal controls was to rear its ugly head after an emerging growth company went public, the new exemption from an auditor’s attestation as to these controls would not limit or eliminate the resulting exposure for the company’s directors or officers.

Next Steps

The JOBS Act requires the SEC to adopt implementing rules on these changes to Regulation D within 90 days of its passage—that is by July 5. The Act also raises the threshold for registration under the Exchange Act.

The JOBS Act amends Section 12(g) of the Exchange Act to increase the limit on shareholders of record from 500 to 2,000 or, in the alternative, 500 persons who are not

  1. “accredited investors”
  2. employees of the issuer who received shares pursuant to an employee compensation plan, or
  3. investors who received shares under the crowdfunding exemption of the JOBS Act.

Among the topics that the SEC must address in its rulemaking is what steps an issuer must take to verify “accredited investor” status. More on this in our next blogs on this exciting topic.

Richard Magrann-Wells and I will examine each of these revisions in individual articles over the coming weeks and discussing their potential impact and insurance ramifications.

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The observations, comments and suggestions we have made in this publication are advisory and are not intended nor should they be taken as legal or financial advice. Please contact your own legal or financial adviser for an analysis of your specific facts and circumstances.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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