On April 5, 2012, President Obama signed the JOBS (Jumpstart Our Business Startups) Act into law.  A primary goal of the legislation is to facilitate the ability of growing companies to raise capital.  The JOBS Act seeks to accomplish this goal by, among other measures, relaxing certain provisions of the Sarbanes-Oxley and Dodd-Frank Acts insofar as those provisions apply to a class of newly public companies dubbed “Emerging Growth Companies” or “ECGs.”  ECG is defined as a company with less than $1 billion in revenues.

One of the most significant changes, from an insurance perspective, is that the JOBS Act reverses Sarbanes-Oxley’s requirement that an investment bank’s research and banking activities be separated.  Under the JOBS Act, an investment bank’s in-house analysts are no longer prohibited from (i) contacting investors regarding an ECG’s IPO, or (ii) participating in meetings with ECG management and the investment bankers.  Similarly, as in the Dot.com era, the analysts are once again allowed to prepare and publish “research reports” about the ECG prior to the IPO without those reports being deemed part of the offering.  The JOBS Act also changes the rules for the issuance of analyst reports following the IPO; under Sarbanes-Oxley, in order to detach analysts from the IPO process, analyst reports were prohibited for a forty-day period following the IPO.

Many Wall Street observers are predicting that the result of these changes will be a large increase in claims of actual or perceived impartiality and misrepresentation surrounding an ECG IPO.  Specifically, if and when a newly public ECG’s stock underperforms, unhappy investors are likely to use the analysts’ research reports as fodder for lawsuits against both the investment banks and the ECG – the basic argument being that the investors justifiably relied on allegedly biased research reports in making their investment decisions.

The JOBS Act also does away with certain disclosure and reporting requirements for ECGs.  For example: an ECG’s IPO prospectus need contain only two years of audited financial statements (rather than the customary three years); ECGs are exempt from Sarbanes Oxley rules requiring that auditors attest to internal controls reporting; and ECGs need not comply with the so-called “golden parachute” and “say-on-pay” rules by which companies are required to submit executive compensation practices to advisory votes by stockholders.

The foregoing changes to disclosure and reporting laws could conceivably reduce the claims made against the directors and officers of the EGCs.  ECGs are, for example, not going to see lawsuits based on their failure to conduct advisory votes on pay packages under the Dodd-Frank Act, or on allegedly misleading disclosures related to executive compensation in connection with merger transactions.