The U.S. House of Representatives passed the version of the Jumpstart Our Business Startups (JOBS) Act approved last week by the U.S. Senate, ensuring President Obama will soon sign into law a measure he supports that promises to help smaller businesses—and, he hopes, improve his re-election prospects with voters worried about job creation, given more than three straight years of unemployment rates above 8%.
By a 380-to-41 vote, the House approved HR 3606, which supporters say will encourage businesses to create jobs by lowering hurdles to going public and complying with the laws governing public companies, such as the Sarbanes-Oxley Act.
Among its provisions, the JOBS Act exempts companies from the full reporting requirements of Sarbanes-Oxley Section 404(b) for their first five years after going public, or until they reach $1 billion in revenue—a provision nicknamed the “on ramp” for initial public offerings. That provision alone should save companies up to $2 million a year—and be of particular benefit to biopharma companies by allowing them to spend more of their money on disease research, according to the Biotechnology Industry Organization (BIO), among groups supporting the bill.
“This legislation incentivizes and encourages capital formation for small, emerging biotechnology companies, speeding the development of new cures and treatments for patients living with debilitating diseases such as cancer, diabetes, Parkinson’s, and HIV/AIDS,” BIO President and CEO Jim Greenwood said in a statement soon after the JOBS Act’s passage.
BIO also cited a recent survey by the National Venture Capital Association (NVCA) showing a 41% decrease by venture capital firms in the amount of money they invested in biopharmaceutical companies over the past three years. The survey also showed 40% of respondents forecasting they would further decrease their investment in the sector over the next three years.
"The JOBS Act will help revitalize an IPO market that has suffered in recent years under the weight of market volatility and one-size-fits-all regulation,” Paul Maeder, general partner at Highland Capital Partners and chair of the NVCA, said in a statement after the bill’s passage. “The passage of this legislation sends a strong and welcome signal to our most promising companies that the U.S. capital markets system is open for business."
But Christopher C. Cain, a partner with Foley & Lardner, told GEN the JOBS Act is less designed to thaw the chilly VC market than to give biopharma startups access to alternative funding sources.
“One of the things I read online that I think was very catchy was that it is moving investments and startups out of the 1%, those wealthy individuals and venture capital firms that have the financial wherewithal to make these investments, and making these startups available to those outside the 1%. It is meant to provide a more diverse base which can include unaccredited investors in certain circumstances, to make non-venture capital funding more of an option where it is now,” Cain said. “Now, if you can’t find friends and family or a superangel network, often a VC or VC firms are the only way to raise money.”
The JOBS Act will expand the eligibility requirements of SEC Regulation A by raising the limit on how much companies conducting direct public offerings can raise, from the current $5 million to $50 million. Regulation A offerings would be exempt from state securities laws, provided that the securities sold are offered or sold through a broker-dealer, offered or sold on a national securities exchange, or sold to a qualified purchaser as defined by the SEC.
The measure will also increase the limit that requires private companies to register with the SEC, from the current 500 shareholders to 2,000 shareholders.
Another component of the JOBS Act requires the SEC to revise Rule 506 of SEC Regulation D, by removing the current ban on general solicitation or advertisements, including social media, in private placements of securities, provided that all purchasers in the private placement are “accredited investors.” The revision is designed to allow greater exposure to investments for a wider range of potential investors.
The JOBS Act is intended to encourage “crowdfunding” by exempting from SEC registration rules any transactions to offer or sell crowdfunded securities by businesses raising up to $1 million within a 12-month period—or up to $2 million if the company provides audited financials within that 12-month period.
The crowdfunding provision includes an amendment added to the bill in the Senate (S. Amdt. 1884) by Sens. Jeff Merkley (D-OR) and Scot Brown (R-MA) on a 64–35 vote. The amendment requires operators of crowdfunding portals to register with the SEC and promise to deliver information on investments they offer without promoting them, while limiting through scalable investment caps how much investors can invest based on their income—a maximum of 2% of investors’ annual gross income for individuals earning up to $40,000 a year; up to 5% for investors earning up to $100,000 a year; and a cap of 10% for those earning above $100,000.
The Merkley-Brown amendment also:
- Requires publicly audited financials for companies seeking over $500,000.
- Establishes a three-week waiting period after funding closes but before funds are received, giving authorities time to uncover potential fraud.
- Requires disclosure of capital-raising fees.
Crowdfunding by itself is less likely to aid biopharma startups than startups in other industries since most such companies require multiple millions of dollars to conduct research and carry out clinical trials.
“If you’re a biotech startup and even if you provide audited financial statements [and thus can raise] $2 million, for a very IP-intensive, clinical-trial intensive company, that may be helpful as part of several raises or a multi-stage raise that you have to do, but it’s not going to be the panacea fix-all. But I don’t think it was meant to be,” Cain said.
“For the biotech company, it’s going to be less used, but it’s still useful in the sense that it may be a good ramp-up,” Cain added. “If they can purposefully use the $1 million or the $2 million, if they can get that, moving them closer down the path toward commercial fruition or closer to clinical trials or they get more patent applications in, it may push them to the stage where a venture capital or a sophisticated angel network is willing to invest a larger sum. So I think it still has value in that regard.”
- Christopher C. Cain, partner, Foley & Lardner LLP – Interview by GEN, March 20.