Will there be a JOBS Act 3.0? The JOBS and Investor Confidence Act of 2018 just passed the House by a vote of 406 to 4, so, even though Senators may often be chary of jumping on the House bandwagon—remember the doomed Financial Choice Act of 2016 and then 2017— the overwhelming and bipartisan approval in the House still makes the odds look better than usual.
What does the bill, S. 488, do? (Don’t be misled by the Senate designation—the version that passed the House is a complete substitution for the Senate version, so the bill still requires a vote in the Senate.) While the bill tackles a lot of subjects, from human trafficking to international insurance standards, it contains several provisions of interest to public and thinking-of-becoming-public companies:
- requires the SEC to amend Reg D to modify the definition of general solicitation to exclude certain presentations to angel investor groups and others;
- amends the definition in the Securities Act of “accredited investor” (and mandates follow-up rulemaking) to index the $1 million net worth test for inflation and to add registered brokers and investment advisors as well as natural persons that have “professional knowledge” with education or job experience verified by FINRA or other SROs;
- allows crowdfunding investors to form “crowdfunding vehicles” advised by registered investment advisers;
- permits the registration of “venture exchanges,” that is, alternative exchanges established, either independently or as a tier of another exchange, “solely for the purposes of trading venture securities,” which are largely smaller or emerging growth public and non-public companies or companies with low trading volumes;
- amends the Securities Act to allow non-EGCs to “test the waters” with qualified institutional buyers or institutional accredited investors and to submit confidential draft registration statements at their IPOs and within one year post-IPO;
- amends SOX 404(b) to add a temporary exemption from the internal controls auditor attestation requirement for any company that ceased to be an EGC after the 5th anniversary of its IPO, is not a large accelerated filer and had average annual gross revenues (over the last three years) of less than $50 million as of its most recently completed fiscal year; the exemption would expire at the earliest of the end of the first fiscal year after the 10th anniversary of its IPO, when its average annual revenue exceeded $50 million or it became a large accelerated filer;
- requires the SEC to conduct an analysis and report on the costs and benefits to companies, investors and other market participants of the Form 10-Q requirement for EGCs and other reporting companies, including the costs and benefits of the public availability of the information required to be filed on Form 10–Q, the use of a standardized reporting format across all classes of reporting companies, and quarterly disclosure by some companies of financial information in formats other than Form 10–Q, such as a quarterly earnings press release;
- requires the SEC to conduct a study of and report on the issues affecting the availability of investment research for small issuers, including EGCs and companies considering IPOs, taking into account factors such as costs, conflicts of interest, competition, payment for research, concentration of investment advisers and broker-dealers, the Global Research Analyst Settlement (see this Cooley News brief), SEC and other rules, liability concerns and the “unique challenges faced by minority-owned, women-owned, and veteran-owned small issuers in obtaining research coverage”;
- requires the SEC to study and report on whether Rule 10b5-1 should be amended (and, if so, conduct conforming rulemaking) to restrict the ability of issuers and insiders to adopt 10b5-1 plans only to permitted trading windows, limit the ability to adopt multiple overlapping trading plans, establish mandatory delays between plan adoption and first trades, limit the frequency of plan modifications and cancellations, require that plans be filed with the SEC and, for issuer plans, require that boards adopt relevant policies and monitor plan transactions;
- amends the Exchange Act to require the SEC to mandate proxy disclosure, for companies with multi-class share structures, regarding the shareholdings and voting power of all classes of securities for all directors, nominees, NEOs and 5% holders; and
- requires the SEC, in consultation with FINRA, to study and report on the direct and indirect costs associated with IPOs by small- and medium-sized companies, such as underwriter fees, legal compliance costs, and to consider those costs relative to other financing alternatives as well as their impact on capital formation.