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New Federal Law Expands the Ability of Companies to Raise Money and Reduces Regulatory Burdens of Going Public

In the last two weeks major legislation has been enacted by the federal government which significantly changes the rules under which companies can access capital markets to raise money for growth, while simultaneously reducing the costs, regulations and burdens of going public. The intent of the new legislation is to stimulate the economy by improving access to capital for start up and entrepreneurial companies.

The “JOBS ACT” or the Jumpstart Our Business Startups Act, recognizes a new category of company which it calls an Emerging Growth Company, or “EGC.” Generally speaking, any company with under $1 Billion of revenue can qualify as an EGC.

The JOBS ACT allows EGC’s to transition from growth companies into public companies by lengthening the time before these companies would otherwise become subject to the full panoply of securities regulations. The intent of the law is to allow companies to continue to grow and create jobs for a period of time by reducing the regulatory burdens which would otherwise apply.

Some of the most important provisions of the Act make it easier for companies to seek capital without having to comply with the complex rules which previously governed securities offerings. These provisions include:

  • The ability to engage in general solicitations, or even advertising, for funds so long as the company makes reasonable efforts to limit its solicitation of funds to wealthy individuals or institutional investors.
  • The ability to raise funds from a large group of investors, each providing a limited amount of funding. This technique is called crowdfunding.
  • Exemption from securities registration requirements for offerings up to $50 Million.

Additionally, once a company determines it wishes to go public, the JOBS ACT substantially reduces the securities law compliance requirements previously in place. These include:

  • Allowing the EGC to “test the market” by allowing communications with institutional investors during the offering process.
  • Allowing the EGC to obtain a private review of its offering materials from the SEC before they are released to the public.
  • Exempting the EGC from certain requirements of Sarbanes-Oxley and reducing the number of audited financial statements required for an Initial Public Offering.

The JOBS ACT seeks to strike a balance between providing significant relief from the technical requirements of the securities laws with an attempt to continue certain protections for potential investors. The hope is that the Act will help growing companies get to the next level much easier, and that it will stimulate economic activity and job creation by lessening burdensome regulations. If you wish to discuss details of the JOBS ACT, please contact your Davis & Kuelthau, s.c. attorney.