April 18, 2012
Louis Taubman, Nekeifa Sylvester
Last week, we published an article discussing the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), which was signed into law by President Obama on April 5, 2012. The JOBS Act, which was written with the intent of encouraging job creation and economic growth by improving access to the public markets for a new category of issuers known as Emerging Growth Companies (“EGCs”), makes significant changes to the rules governing capital raising for such EGCs. Following publication, we received numerous inquiries from clients regarding certain aspects of the JOBS Act. This article will briefly discuss the two main areas of inquiry: (1) changes to the rules regarding Initial Public Offerings (“IPOs”) by EGCs and (2) changes to the rules regarding general solicitation and advertising for EGCs relying on the safe harbor provisions of Rule 506 of Regulation D and Rule 144A.
The first changes under the Act relate to initial public offerings by EGCs. The JOBS Act substantially liberalizes the public offering process for EGCs in several ways. It provides that an issuer may submit a confidential registration statement to the Commission as long as such registration statement is filed publicly at least 21 days prior to the commencement of any road show by the issuer. This will allow issuers who are uncertain as to whether they would like to go forward with an IPO to file confidentially, thus preventing the public release of certain strategic or financial information about the company that may harm its competitive position until an IPO is certain. This change also allows issuers that are uncertain as to market conditions for an IPO to prepare for a possible IPO without the risk of negative press should market conditions be unfavorable for such IPO at or after the time the registration statement is filed. Additionally, the new act liberalizes communications regarding EGC issuers during the IPO process by allowing broker-dealers to publish research on the issuer during a pending IPO without such research report being deemed an offer to sell the securities of the issuer, even if such broker-dealers will participate in the IPO. The act also allows EGCs or persons acting on their behalf to engage in oral and written communications with qualified institutional buyers (“QIBs”) (as defined in 144A) to determine if they have interest in the offering without having to file such written offers as a free writing prospectus.
The second set of inquiries relate to private offerings. Specifically, changes to the rules regarding general solicitation and advertising under Rule 506, which state that the provisions prohibiting general solicitation and advertising shall not apply to offers and sales of securities made pursuant to Rule 506 of Regulation D, provided that all of the purchasers of the securities are accredited investors. The revised rules, which are required to be published no later than 90 days from the date of enactment of the JOBS Act, will require issuers to take “reasonable steps” to verify that investors are actually accredited investors. Additional changes are also mandated for Rule 144A offerings such that 144A qualified offerings may now be offered to persons other than QIBs, including by means of general solicitation or advertising, as long as such securities are only sold to persons that the issuer reasonably believes to be a QIB.
We will continue to publish additional articles regarding these changes in order to keep our clients as up to date as possible on new rule changes.
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