Beginning next year, when the so-called U.S. JOBS Act is implemented, American start-ups are going to find it a lot easier to launch initial public offerings and raise money through private placements. But will Canadian companies get in on the Act as well?
Toronto-based law firm Osler Hoskin & Harcourt says the Jumpstart Our Business Startups Act offers enough regulatory exemptions aimed at making it easier and less expensive for small companies to conduct public and private securities offerings in the U.S., that it should be of interest to Canadian issuers.
“It really does mark a departure from the trend of increased regulation,” says Osler’s New York-based securities lawyer Jason Comerford, who’s studied the JOBS Act, including implications for Canadian issuers. “It represents a recognition that if the current rules are stifling new market entrants, and the U.S. capital markets are losing ground because of it, something had to be done.” That something turns out to be the creation of a new category of so-called emerging growth company (EGC)—businesses that aren’t yet public and have less than US$1 billion in annual revenue—that are exempt from various compliance requirements for up to five years after launching an initial public offering.
According to Osler, these rule changes will primarily be of interest to Canadian issuers that qualify as EGCs and that intend to file an IPO registration statement with the SEC but are not eligible to use the U.S.-Canada Multijurisdictional Disclosure System because they do not meet the Canadian reporting history or public float requirements.
Under the new legislation, EGCs that go public will only have to provide two, rather than three, years of audited financial statements; won’t have to provide information on executive compensation; and won’t have to obtain independent auditor’s attestation reports.
“The auditor’s attestation requirement in particular has been a sore point for small companies,” says Comerford. “The requirement was put in place after the Enron blow-up when the integrity of financial statements was being called into question, but for small issuers it consumes a lot of time and financial resources. So for EGCs, the exemption eliminates one of the biggest costs of compliance.”
The JOBS Act also raises the size thresholds that trigger SEC filing requirements. Going forward, emerging growth companies won’t have to register securities or file public disclosure with the Securities Exchange Commission until they have 2,000 shareholders, up from the current threshold of 500, and can sell up to US$50-million worth of securities in a 12-month period, up from $5 million, before having to register with the SEC.
“The $50-million exemption should be attractive to Canadian companies doing private placements in the U.S., especially since securities offered under the exemption can be freely traded and available to the public,” says Comerford.
And since the JOBS Act strikes down prohibitions against general solicitation and advertising regulations, Canadian companies will be able to disseminate press releases and research reports on private equity offerings in the U.S., without running afoul of the SEC. The Chinese wall between research analysts and brokers is also being partially disassembled: henceforth brokers and dealers will be allowed to arrange meetings between analysts and investors, and analysts can sit on it on meetings with brokers and management.
Even though these former rules were intended to prevent a repeat of the abuses of the late 1990s, when analysts were writing glowing reports on failing dot-com companies, Comerford says the JOBS Act is unlikely to herald a return to the bad old days of compromised research.
“Rules remain in place to prevent conflicts of interest when it comes to the use or abuse of analyst reports, and the memory of the dot-com debacle should act as a deterrent to unethical practices,” he says.
Perhaps the most controversial—and potentially game-changing—element of the JOBS Act is the co-called crowdfunding exemption, which allows early-stage companies to sell up to US$1 million in securities through a yet-to-be-developed online platform, without having to register as a publicly traded company.
Crowdfunding legislation in the JOBS Act allows companies to raise a maximum of $5,000 from investors who earn less than $100,000 per year, and up to $100,000 from high-net-worth individuals—in other words, small sums of money from a potentially huge investor base. It’s designed to replace or augment the kind of early stage funding traditionally provided by angel investors and venture capitalists, but that has been increasingly hard to access.
“When legislation toughened up as a result of the dot-com crash, the IPO market dried up, venture capitalists couldn’t get their investments out and the whole funding ecosystem collapsed,” says Andrea Johnson, partner with law firm Fraser Milner Casgrain LLP. “Now the U.S. is creating from scratch a new fundraising technique that addresses the gap between having an idea for a business, and being able to turn that idea into a real company.”
Johnson, who is based in Ottawa, says the need for a similar platform in Canada is even greater. “If the U.S. needs this legislation then Canada needs it 10 times more. We have a serious problem where our early stage technology companies are capital-starved.”
That’s also the position of the Canadian Advanced Technology Association: it’s been aggressively lobbying to have the Canadian Securities Administrators look at adding crowdfunding provisions to Canadian law—so far without success.
“Unlike the U.S. where they passed the JOBS Act relatively quickly, it seems it’s hard to get anything done in real time here in Canada,” says CATA president John Reid. “We talk a lot about the need to support the digital economy, but the vast majority of government attention and policymaking seems to be focused on resource extraction. Where’s the political leadership? CATA is saying crowdfunding should be a priority.”
Of course, the CSA and provincial regulators may be forced to address crowdfunding whether they want to or not: once the SEC sets the rules on crowdfunding and implements the JOBS Act—and it has been given until the end of the year to do so—there will be no practical way to prevent Canadian investors from using the U.S. platform.
“The digital border is permeable,” notes Johnson. “So unless regulators want to do something really drastic like start blocking Canadian IP addresses, they’re going to have to deal with crowdfunding in enforcement, whether they want to follow suit with exemptions or not.”