The JOBS Act (Jumpstart Our Business Startups) will amend a broad range of provisions in the U.S. federal securities laws once it is signed by the President. This advisory focuses on the changes that will impact IPOs for a new category of “Emerging Growth Companies,” referred to as EGCs, which are companies with less than $1 billion in revenues. The new law will reverse for EGCs the application of some of the key provisions of the Sarbanes-Oxley and Dodd-Frank Acts, and will go further in providing more flexibility for the conduct of IPOs of EGCs than has ever existed under the Securities Act of 1933. The provisions discussed here, unlike some other provisions of the JOBS Act, will take effect immediately upon enactment, although some provisions may require further rulemaking to implement them fully.
Testing the Waters. The JOBS Act introduces a new exemption that covers all communications regarding EGCs that are made only to "qualified institutional buyers" (QIBs) or “institutional accredited investors”. These communications are not considered to be offers, so they can be made at any time before or during an IPO registration process without being regarded as “gun-jumping.” (This exemption opens the door to “non-deal roadshows” and other meetings and communications with institutional investors regarding the planned IPO, at any point during the IPO process. However, new procedures will need to be carefully planned and followed to avoid any of these communications being deemed an offer to other investors, for which the old rules still apply.)
Confidential Filings. An EGC’s initial registration statement filings with the SEC can remain confidential, i.e., not publicly available. However, all of those filings must be made publicly available at least 21 days before the EGC launches its IPO road show. (In most cases, this would allow one or more rounds of SEC comments on the filing before an EGC and its underwriters have to make a decision to make the EGC’s filings public in order to continue the IPO process.)
Analysts Welcome. Analysts are free once again to meet with and contact investors regarding an IPO of an EGC, and they can participate in investment banker meetings with EGC management. (This reverses one of the most significant changes of the Sarbanes-Oxley Act.)
No Limitations on Research Reports. No SEC or other regulatory limitations will be allowed on the publication or distribution by broker-dealers of analyst reports regarding an EGC within any period of time following the IPO (as has been the case in order to distance them from the initial offering process). The JOBS Act even allows "research reports" to be published and distributed before the IPO without them being deemed part of the offering. (It remains to be seen how widely this research report provision will be relied upon by a participating investment bank’s analyst in order to publish reports before an EGC’s IPO or the initial distribution of the offering.)
Only 2 Years of Financial Information Required. Only two years of audited financial statements are required for an EGC IPO prospectus, and no 5-year unaudited data are required. In addition, new accounting standards will not apply unless they apply to non-public companies.
No Auditor Attestation of Internal Controls Reporting. EGCs are exempt from the burden of auditor attestation of internal controls reporting implemented by the Sarbanes-Oxley Act. The JOBS Act also exempts EGCs from having auditor rotation on their audits should that requirement be adopted.
Smaller Reporting Company Rules for Compensation Disclosure. In the IPO, and continuing for so long as a company reports as an EGC, it need include only the compensation information required of “smaller reporting companies”, i.e. no CD&A, less detailed compensation information, and only for the CEO and the next two highest paid executive officers (plus up to two others). An EGC also will be exempt from the new compensation reporting rules that are still pending regulatory action by the SEC.
No Say on Pay. EGCs are exempt from the Say-On-Pay and golden parachute rules, under which reporting companies submit their pay practices to non-binding, advisory stockholder votes.
A company that qualifies to go public as an EGC will continue to be subject to the more lenient EGC rules until the earlier of:
- the end of the fiscal year in which the EGC exceeds the $1 billion revenue level
- the last day of the fiscal year following the 5th anniversary of its IPO
- the date on which the EGC has issued more than $1 billion in non-convertible debt during the previous 3-year period
- the end of the fiscal year in which the EGC, as of the end of its second fiscal quarter, becomes a “large accelerated filer” (i.e., has a market capitalization of at least $700 million held by non-affiliates).
An EGC may choose to forego any of the relief afforded it under the JOBS Act. However, if an EGC chooses to comply with any new accounting standards for non-EGC companies adopted after the enactment of the JOBS Act, it must comply with all such standards and must make the choice at the time it is first required to file a 1934 Act registration statement or report.
This summary indicates how the sweeping nature of the provisions of the JOBS Act will change the practices of investment banks regarding IPOs of Emerging Growth Companies. These changes also will require new procedures to make sure that the banks and EGC issuers do not incur unforeseen liabilities for the newly permitted practices.
Some companies, by waiting until their revenues exceed $1 billion before going public, will not be able to take advantage of these new rules. However, these rules will apply to all companies that qualify as EGCs and have filed for or completed an IPO since December 8, 2011.