The Jumpstart Our Business Startups Act (JOBS Act) passed by the House yesterday, includes several provisions to relax certain SEC requirements for smaller companies, including under Sarbanes-Oxley Section 404(b), to help faciliate capital formation. The Senate still has to vote on its version of the bill (see our previous post post on the Senate hearing earlier this week). Major provisions are listed in the House Financial Services Committee's press release.
Among those provisions are:
New Category of Filer, Emerging Growth Co's, Exempted from Sarbox 404(b), More
- Reducing the cost of going public. This provision is from H.R. 3606, the Reopening American Capital Markets to Emerging Growth Companies Act of 2011, introduced by Reps. Stephen Fincher and John Carney. The bill creates a new class of public companies called emerging growth companies that will make it easier for more companies to access the capital markets by reducing the cost of going public for small and medium size companies. [See Sarbox, below]
- Removing a regulatory ban that prevents small companies from using advertisements. This provision is from H.R. 2940, introduced by Rep. Kevin McCarthy. The bill removes the regulatory ban that prevents small, privately held companies from using advertisements to solicit investors.
- Removing SEC restrictions that prevent companies from raising equity capital from a large pool of small investors. This provision is from H.R. 2930, introduced by Rep. Patrick McHenry. The bill removes SEC restrictions that prevent “crowdfunding” so entrepreneurs can raise equity capital from a large pool of small investors who may or may not be considered “accredited” by the SEC.
- Increasing the offering threshold for companies exempted from SEC registration. This provision is from H.R. 1070, the “Small Company Capital Formation Act,” which was introduced by Representative Schweikert. The bill makes it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration from $5 million to $50 million.
- Raising the threshold for SEC registration. This provision is from H.R. 2167, the “Private Company Flexibility and Growth Act,” which was introduced by Representative Schweikert. The bill removes an impediment to capital formation for small companies by raising the shareholder threshold for mandatory registration with the SEC from 500 to 1,000 shareholders.
- Modernizing the threshold for SEC registration and deregistration for bank holding companies. This provision is from H.R. 4088, the “Capital Expansion Act,” which was introduced by Representative Ben Quayle. The bill raises the threshold for mandatory registration under the Securities Exchange Act of 1934 from 500 shareholders to 2,000 shareholders for all banks and bank holding companies and raises the shareholder deregistration threshold from 300 shareholders to 1,200 shareholders
HR 3606 (aka Title I of the JOBS Act), establishes a new category of SEC filer, based on a revenue measure (vs. the existing market cap measures). The new category of Emerging Growth Companies (EGCs) would be those small public companies with less than $1 billion in annual revenue. EGCs would be exempted from Sarbanes-Oxley Section 404(b) - the requirement for an external auditor's report on a company's internal control over financial reporting - but would not be exempted from Sarbox Section 404(a) - the requirement for a management report on (management's assertion on) the effectiveness of internal control over financial reporting.
An excellent summary of the changes to Sarbox and changes to other SEC requirements that would be effective by law for this new category of EGCs can be found in Jim Hamilton's World of Securities Regulation Blog.