Last week, US President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. What effect will this new Act, with a goal to make it easier for startups and small businesses to raise funds, have on Canadian companies?
Osler, Hoskin & Harcourt LLP has posted an update on their website that gives a detailed breakdown of the legislation and how it may impact companies in Canada.
Although it still remains to be seen how all of the provisions will play out, since the US Securities and Exchange Commission (SEC) must now make specific rules based on the legislative changes, the Act has bipartisan support for removing bureaucratic government barriers to job creation.
But some groups feel the new Act may re-open the door to conflicts of interest that have plagued Wall Street and fraudulent activity like what occurred in the dot-com bubble in the 1990s.
Jason Comerford, a partner at Oslers’s New York office, says the new Act may also be a harbinger of a more liberalized securities regulation environment in the US:
The JOBS Act is significant not only for the specific changes that it introduces but because it marks a bit of a shift away from the trend of increased regulation and disclosure and compliance obligations that characterize Sarbanes–Oxley and the Dodd Frank era. I think really it shows a concern of US Congress that too much regulation could stifle the growth of smaller and emerging companies and ultimately harm more than help the economy, really that one size fits all securities regulation might not work.
As for Canadian companies, Comerford says “a fairly large segment” will likely be affected:
I think that different elements of the JOBS Act will be of interest to a fairly wide range of Canadian companies.
Comerford points out that the threshold for what passes for an emerging growth company in the United States is pretty high at less than a billion dollars in total gross revenues on an annual basis. This will capture a very large portion of the companies out there that are in their pre-IPO stage and allow them to take advantage of some of the relaxation of the obligations that are being introduced by the Act.
I think as well that a lot of the Canadian public companies who conduct US private placement offerings side by side with their Canadian public offering might see elements of the JOBS Act legislation that provides them with some additional flexibility in connection with their US private placements. I think that really in total we are going to see different elements of the Act being of interest and potential benefit to a fairly large segment of the Canadian capital markets community.
Two controversial elements of the legislation are a relaxation of some of the analyst communication that can take place in connection with offerings of securities by emerging growth companies, and another that allows businesses to raise up to $1 million by selling shares without formally becoming public by what is termed “crowdfunding”.
The crowdfunding provisions may arguably increase the risk of small companies engaging in fraudulent activity, according to Comerford, and the increased flexibility to issue research about emerging growth companies has caused some to express concern about “the potential for favourable research to accompany a securities offering by the subject company in a way that up to this point in time has been prevented by SEC and [Financial Industry Regulatory Authority] rules.”