JOBS Act Of 2012
Dale J. Jensen
DALLAS–Because of technological advances, availability of credit, and improving economic conditions, the oil and gas industry should continue to grow immensely. A look at industry activity in Texas alone illustrates the impact new technologies are having for oil and gas companies.
The Barnett Shale, Permian Basin and Eagle Ford Shale all are poster child plays representing America’s new resource potential. Last November, the Paris-based International Energy Agency projected the United States would overtake Saudi Arabia as the world’s largest oil producer within this decade (AOGR December 2012, pg. 32).
Adding to the benefits of the technologies that are transforming U.S. oil and gas production are attractive lending markets and improving national and international economic conditions. Such trends illustrate the potential for growth within the oil and gas industry. Those conditions make it worthwhile for smaller private oil and gas companies to become familiar with the provisions of the JOBS Act.
General Provisions And Aims
When President Obama signed the JOBS Act into law on April 5, 2012, he and congressional leaders hoped it would promote economic growth and ultimately help create jobs. The act’s aims include making it easier for smaller companies to attain more investor support and making the path to public corporation status less daunting. Specific provisions include:
- Allowing private companies to enlist more investors without having to register securities activity with the Securities and Exchange Commission;
- Lessening the regulatory burdens associated with undergoing an initial public offering through a variety of provisions collectively known as the “IPO on-ramp;” and
- Easing the reporting requirements that newly established public corporations otherwise would face.
To capitalize on JOBS Act provisions, an oil or gas company must meet the act’s definition of an emerging growth company (EGC). An EGC is virtually any business with less than $1 billion in annual revenues undergoing an IPO, which encompasses many companies in the oil and gas industry. A qualifying company retains EGC status until one of the following events occurs:
- The company issues more than $1 billion in outstanding nonconvertible debt in three years.
- The company ends a fiscal year with the market value of its outstanding common equity owned by nonaffiliates equaling or exceeding $700 million.
- The company ends a fiscal year with annual revenues of $1 billion or more.
Broader Investor Activity
While the JOBS Act’s IPO on-ramp provisions have garnered considerable attention, the act also has eased restrictions companies previously faced when trying to raise additional investment capital within the private markets.
The JOBS Act does not require a company with more than $10 million in assets to register investor activity with the SEC until it has 2,000 investors, or 500 investors that meet the SEC’s “nonaccredited” definition. A public reporting company also may file a Form 15 and opt-out public filings, if its shareholder listing shows fewer than 1,200 investors.
Rule 501, Regulation D of the Securities Act of 1933 provides a detailed definition of an accredited investor. That definition encompasses various types of entities, as well as persons whose individual or joint net worth exceeds $1 million, not counting a primary residence’s value.
SEC Rule 506 generally requires a company to meet numerous conditions and requirements pertaining to accredited investors. Among other items, Rule 506 did not allow using any means of general advertising or solicitation to attract such investors. The JOBS Act directed the SEC to amend Rule 506 as it applies to companies meeting the EGC requirements. The JOBS Act also directed the SEC to similarly amend Rule 144A restrictions regarding general solicitations aimed at qualified institutional buyers (QIBs).
The SEC issued proposed rules addressing those changes for Rule 506 and Rule 144A on Aug. 29. While the SEC did not issue its final rules by the end of 2012, the JOBS Act will make it easier for companies to attract greater investor support while remaining private companies.
Ease Communication Rules
During the past 10 years or so, financial reporting scandals involving very large corporations prompted Congress to pass more stringent compliance and disclosure measures for public companies, including the Sarbanes-Oxley Act of 2002.
While such regulations provide increased oversight for investors and other stakeholders, those measures increase the costs and requirements private companies face when entering the IPO process. The JOBS Act eases some of those costs and requirements for EGCs.
The SEC allows EGCs to file registration statements confidentially for review and feedback, rather than face customary public disclosure requirements. The EGC does not have to make that registration information public until it makes a definite commitment to proceed with the IPO.
The JOBS Act also allows a company to communicate with institutional accredited investors and QIBs during the IPO process.
Those confidential filing and investor communication opportunities enable a company to “test the waters” and re-evaluate plans during the IPO filing process. The relaxed communication restrictions also may promote greater interest and trading activity for companies meeting the EGC definition.
Rather than having to file audited financial statements for three years, an EGC seeking to become a public corporation only needs to file such statements covering two years. An EGC also enjoys easier reporting requirements regarding executive compensation disclosure and certain other concerns.
When an EGC becomes a public corporation, it has five years to fully comply with Sarbanes-Oxley, rather than the two-year phase-in required of most newly formed public corporations. EGC companies also are exempt from any new or revised accounting standards until those measures are required for private companies.
Cautions And Considerations
While the JOBS Act includes numerous provisions that make it easier for oil and gas companies to attract investment, a variety of considerations remain that must be evaluated before seeking that investor support.
Companies still must address the inherent risks associated with the oil and gas industry. Oil and gas companies always have been subject to cyclical commodity price increases and declines. Those cycles influence many decisions in a capital intensive industry.
Various actions in Nigeria, Venezuela, Saudi Arabia and other energy-producing countries influence the market conditions confronting energy companies in the United States as well. That is particularly true for oil companies.
The potential benefits that emerging technologies present the industry carry risks, as well. For example, the increased use of hydraulic fracturing and horizontal drilling has led to calls for increased regulatory oversight of exploration and production activities.
Political events and the outcome of last year’s elections also could lead to significant changes in the federal tax code that could have substantial financial consequences for oil and gas companies. For the past several years, longstanding tax provisions designed to help oil and gas companies recover their capital expenditures, including the intangible drilling cost deduction and the percentage depletion allowance, have been under scrutiny by the Obama administration and Congress. The future of such tax policies may hinge on the outcome of political negotiations.
A company must be equipped to recognize and respond to those various industrywide exposures, as well as the risks facing individual companies. A company also must determine whether it is prepared to handle the various requirements and challenges that accompany a broader investor base, especially if it enters the IPO process.
While public corporation requirements may be relaxed for an EGC, it still must meet numerous compliance or reporting provisions. An EGC must have the personnel and processes to meet those mandates, and be able to address the concerns of shareholders, analysts and other stakeholders.
Even with the relaxed requirements and the IPO on-ramp provisions, the process of becoming a public company may take longer than senior managers anticipate. Audited financial statements submitted by an EGC may need to be re-audited to meet Public Company Accounting Oversight Board requirements. Other delays or concerns may arise as well. Regardless of specific company circumstances, the process of becoming a public company will remain an expensive and time-consuming endeavor.
Still, for companies that are fully prepared for growth and the various requirements they will face, the JOBS Act does make it a bit less onerous to seek greater investor support.
At year-end 2012, the SEC still needed to enact final rule changes pertaining to the JOBS Act. Given that the act itself has not yet been in effect for a full year, it is also difficult to gauge the long-term impact the JOBS Act will have on the U.S. economy in general, and the oil and gas industry in particular.
The JOBS Act, though, loosens restrictions and requirements for companies seeking greater investor support in either the private or public markets. Within the private markets, a company can build a broader base of investors without having to meet SEC registration requirements.
For companies considering becoming public corporations, the relaxed rules regarding IPO process disclosures and communication enable company officers to re-evaluate plans before firmly committing to going public. The opportunities for greater communication among various parties also may spur greater investor and market interest in the IPO market for companies that meet the EGC criteria.
Once an EGC becomes a public corporation, it will face comparably fewer onerous requirements, allowing an oil and gas company more time to adapt to its public market status.
The JOBS Act by itself will not transform a smaller oil or gas company into a larger, successful entity. But for companies that are prepared to accommodate growth and are looking to raise capital in today’s private or public markets, however, the JOBS Act offers numerous benefits for attaining greater investor support.
Dale J. Jenson, CPA, CFE, is a partner in assurances services in Dallas, and the oil and gas leader for the Dallas/Fort Worth offices of Weaver, the largest independent accounting firm in the Southwest. His practice concentrates on audit review and compilation services for the oil and gas industry, higher education, privately and publicly held businesses, local governments, and nonprofit institutions. Jensen joined Weaver as a senior associate II in 2002 and was made a partner in 2009. Previously, he worked for a small accounting firm in Arkansas. Jensen earned a B.B.A. from Southern Arkansas University.