A deluge of ink has been spilled on the topic of the Jumpstart Our Business Startups (JOBS) Act since its passage into law in April 2012. The law was conceived to make capital formation easier to achieve through mechanisms both conventional (Emerging Growth Companies) and kitschy (crowdfunding). While much has been written to parse the potential impacts of controversial pieces of the law, it's equally true that the JOBS Act has been dissected so laboriously because it has taken so long for its components to go into effect.

Mary Schapiro's tenure as chairman of the US Securities and Exchange Commission (SEC) was contentious in regards to both Congress and the financial services industry. She opposed the JOBS Act before its passage, and despite deadlines imposed by the law, failed to deliver rules on some of its provisions.

A Congressional investigation revealed in December 2012 that Schapiro deliberately delayed implementing provisions of the law for fear of the impact they would have on her legacy. After her departure from the commission that same month, her successor, Elisse Walter, was confirmed after stating that enacting the JOBS Act in full would be a priority. Walter's successor, Mary Jo White, has continued this effort, and the bulk of the law has gone into effect. The small-investment practice known as crowdfunding, a capital formation conduit impracticable for E&P companies, is still in play.

Now that nearly two years have passed since the JOBS Act became law, it's possible to review how some of its provisions are affecting the oil and gas industry, and touch on the potential for a pending piece of the legislation.

Emerging Growth Companies

The emerging growth company (EGC) designation ostensibly was created by the JOBS Act to make it easier for companies with less than $1 billion in revenue, among other qualifications, to go public.

Perks of the designation include reduced reporting, reduced auditing controls and disclosures, and opacity of executive compensation as well as exemption from nonbinding shareholder voting on executive compensation.

In the grand scheme of things, these benefits are tchotchkes, as crucial to a company going public as the assurance that the Super Bowl will involve competing football teams. The bulk of eligible companies going public aren't implementing the full slate of EGC amenities. The crown jewel of the EGC title is that it allows issuers to communicate confidentially with the SEC before their offering, and to a lesser extent, they are allowed to test the waters with potential investors.

A simple analysis confirms that the existence of EGCs isn't hurting the US IPO market. It's not helping it, either. Excluding Facebook's IPO, quarterly gross raises still trail 2011's IPO volume, if by only a small margin. After feeling out the JOBS Act in the second half of 2012, it seems that issuers that can be classified as EGCs are embracing the designation, accounting for more than 55% of the issues in the latest quarter reviewed. EGC postings before the law passed were done retroactively. While Congress' hope that the JOBS Act would cause significant growth in the number of companies going public may

have fallen short, with nearly two years to absorb the JOBS Act the EGC designation is a mainstay with issuers that can use it.

For E&P companies, the EGC classification is becoming common practice. Jones Energy Inc.'s $187-million IPO in July 2013 and Athlon Energy Inc.'s $315-million raise in August are recent examples. The designation could be of value to the vast majority of E&P issuers. Of the nearly 300 global E&P companies to go public since January 2000, 96% of North American operators would have qualified for EGC status, with large revenue companies and those deemed accelerated filers excluded. As of this writing, four of the eight E&P companies with announced IPOs, including RSP Permian Inc., are registered as EGCs.

Advertising

Even though being an EGC won't necessarily make going public an option for companies previously excluded, there are still provisions of the JOBS Act that can aid in capital formation. One such instrument is the lifting of the ban on general solicitation for issuers. Provided an issuer (or affiliated agent) registers under Regulation D 506(c), and accepts capital only from accredited investors and takes reasonable steps to verify their status as such, said issuer can advertise its offering freely. If the issuer is properly cleared to solicit, this provision eliminates the past dubious protocol of only approaching investors with whom a pre-existing relationship existed.

The ban on solicitation dated back to the Securities Act of 1933. Understandably, issuers are wary of using the new ability to advertise, but some entities are preparing to do so. From September to November 2013, approximately 10% of the 2,892 issuers that registered with the SEC opted to have the capability to advertise their offerings. Time will tell if the practice grows more common.

Regulation A+

Regulation A transactions are private placements previously limited to $5-million raises a year. They're subject to state “blue sky” registration requirements, which can make offerings costly if sold in numerous states. Small businesses have historically used Regulation A for intrastate offerings. For oil and gas raises, the $5-million maximum alone makes Regulation A offerings inconvenient, if not impractical.

The JOBS Act amends Regulation A transactions (colloquially known as “Regulation A+”) so that the mechanism may be of use to operators. Regulation A+ will exempt offerings from blue sky registration and raise the offering limit to $50 million for any 12-month period. Moreover, the offering could be in any combination of securities: debt, equity, rights, etc. Those securities will also be freely tradable, which is attractive to both investors and employees. While even small drilling programs can stretch beyond $100 million in aggregate, a $50-million annual limit and Regulation A+'s streamlined filing requirements could be of use to a large number of companies.

Of course, the rules for Regulation A+ haven't been written yet. The SEC has to craft procedures and disclosures that meet the law's objective of easing capital formation for smaller issuers while accomplishing the same thing blue sky laws do: protect investors against fraud and bad actors. Currently, the JOBS Act states that Regulation A+ offerings can only be sold to “qualified purchasers” as defined by the SEC specifically for this exemption. There are numerous definitions of investors the SEC can use, but the thresholds for investor sophistication, liquid net worth, and investment amounts will determine how much Regulation A+ is used.

Conclusion

The JOBS Act wasn't meant to be a panacea for capital formation in its conception. It was cobbled together from six disparate pieces of legislation and passed with bipartisan cooperation. As such, the JOBS Act houses rule changes, designations and new processes across the broad spectrum of capital formation, to say nothing of ancillary measures that have nothing to do with raising money that were passed en masse. Even as parts of the law trickle into practice, capital markets are adjusting and determining what's acceptable for investors and what's practicable for issuers.

EGCs will continue to be a substantial part of the IPO marketplace. What was thought, and perhaps feared, to be the dominant method of going public has been transformed into a menu from which issuers order a la carte. While issuers are eschewing some of the more opaque options EGC status confers, the overwhelming majority are choosing to communicate confidentially with the SEC.

Similarly, investment managers and issuers are contemplating general solicitation, though it's unclear to what extent it will be used. Should those entities come to the conclusion that enough accredited investors will subscribe to their offerings to make the risk of advertising worthwhile, the practice will flourish. More than likely, advertising will be moderated for the foreseeable future.

Regulation A+ is truly the hardest provision of the JOBS Act awaiting release to handicap. It could be a boon to the middle market, resulting in raises of up to $50 million with minimal filing. But depending on the rules the SEC crafts for its release, it could just as easily be ignored by issuers and fade into obscurity.

Scott Cockerham is a partner at Parkman Whaling LLC, an energy investment and merchant bank in Houston. Prior to joining Parkman Whaling, he worked at Deutsche Bank and Goldman Sachs.