Since it first enacted the Jumpstart Our Business Startups (JOBS) Act in 2012, Congress has continued to modify the original JOBS Act as part of an ongoing effort to try to boost small businesses and business startups. For example, in 2015, Congress acted to expand a number of the JOBS Act’s provisions. On July 17, 2018, the U.S. House of Representatives passed what has been referred to as the JOBS Act 3.0. By a vote of 406-4, the House passed the JOBS and Investor Confidence Act of 2018, which is designed to further encourage capital formation and market access for small business enterprises. The House Financial Services Committee’s July 17, 2018 statement about the legislation can be found here.


The bipartisan bill combines 32 separate pieces of legislation that either had already passed a vote of the House or had been approved by the House Financial Services Committee since 2017. Senate Majority Leader Mitch McConnell reportedly has committed to bring the bill up for a vote in the Senate.


The bill provides for what is essentially incremental change with respect to a number of existing laws and practices:


Rule 10b5-1: The bill directs the SEC to conduct a study into whether Rule 10b5-1 (allowing corporate executives to adopt written trading plans to allow the executives to trade in their personal shares of company stock without incurring liability) should be limited. Among other things the SEC is to look into whether to limit the use of multiple, overlapping plans; to limit the frequency of plan amendments; to require a delay between plan adoption and the first trade under the plan; and to require companies and executives to file the trading plans with the SEC. The SEC is required to revise Rule 10b5-1 consistent with the results of the study.


Accredited Investor: The bill expands the definition of “accredited investor” by adding criteria that measure an investor’s sophistication and not just their wealth. The definition is expanded to include persons currently licensed or registered as a broker or investment advisor or any other natural person the SEC determines by regulation to have education or job experience to provide the person with sufficient professional knowledge of a particular investment. The upshot of this change is, according to the July 18, 2018 Law 360 article discussion the bill (here), “enlarging the population that is eligible to participate in private securities offerings.”


Auditor Internal Control Certification: The bill would allow Emerging Growth Companies (EGC) with revenues of less than $50 million to opt out of having to hire an outside auditor to certify that the companies’ internal controls over financial reporting are effective, beyond the typical 5-year period.


Form 10-Q: The bill directs the SEC to report to Congress on the costs and benefits of requiring EGCs to file quarterly reports on Form 10-Q and to consider alternatives to requiring quarterly reporting for ECGs. The bill also directs the SEC to report to Congress with ways to increase transparency and reduce costs associated with EGCs’ quarterly financial reporting.


“Testing the Waters”: The bill would allow all companies to communicate with institutional investors in the order to gauge the level of interest in advance of an initial public offering (IPO). The bill would also expand the confidential submission process to include all prospective IPO companies (and not just EGCs), allowing them to submit their registration statement to the SEC confidentially, in order to get feedback from the SEC before proceeding with the planned offering.


The Act introduces a number of other proposed changes, including measures intended to ease regulations on “angel investors” in order to make it easier for startups to communicate with prospective investors without running afoul of the securities laws; to allow the establishment of venture exchanges, that would be registered with the SEC in order to allow the trading in securities of private companies, as well as of listed companies whose shares trade below a specified daily trading volume.


The bill also directs the SEC to study the extent to which underwriting costs and other expenses are deterring small and medium enterprises from undertaking public offerings of securities; and to study how small and emerging companies can attract more research coverage in order to obtain greater interest in their securities. The bill also requires companies with multi-class share structures to include disclosures within their proxy statements about the various shareholders’ respective voting powers.


The bottom line is that the bill introduces a number of incremental changes designed to try to boost startups and small enterprises in order to try to ease their ability to attract investment and to operate with less burden and expense. None of these changes are game changers, but collectively the changes could help encourage these small enterprises.


The proposed changes to Rule 10b5-1 arguably are long overdue. Rule 10b5-1 has been in place now for nearly 19 years, and during that time it has proven that, used properly, it can provide corporate executives with a substantial defense to allegations that their trading in their company’s securities represents evidence of scienter. (Refer here for discussion of a recent case in which the Rule operated this way to provide a defense.) However, during that time, we have also seen that Rule 10b5-1 trading plans can be abused; the most egregious example was illustrated in the 2009 enforcement action against former Countrywide Financial CEO Angelo Mozillo, in which it was shown that Mozillo had used multiple overlapping plans in order to try to trade in his shares of his company’s securities. The SEC alleged that the plans had allowed Mozillo to reap vast trading profits while he was aware of his company’s increasingly deteriorating condition. The various changes that the bill recommends that the SEC study would aim to try to put an end to these and other kinds of potential abuses of Rule 10b5-1.