Since shortly after the JOBS Act became law, the SEC staff has been reviewing registration statements filed by emerging growth companies (EGCs). While parts of the JOBS Act are not effective until the SEC issues implementing rules (such as the crowdfunding provisions), other parts of the JOBS Act became effective when the JOBS Act became law, including provisions related to disclosures by EGCs in their SEC filings and certain other requirements. EGCs are not subject to the requirement for an auditor attestation of internal controls pursuant to Section 404(b) of the Sarbanes- Oxley Act of 2002 (Sarbanes-Oxley Act) and certain provisions of the Dodd-Frank Act includ- ing: (i) requirements to disclose CEO pay-ratio information and the relationship between the company’s financial performance and executive compensation; and (ii) requirements for advisory votes on golden parachute payments and say- on-pay and say-when-on-pay votes. In addition, EGCs are required to present two, rather than three, years of audited financial statements in registration statements and can take advantage of longer phase-in periods for changes to financial accounting standards.
It seems that the SEC has developed a standard set of comments it issues upon its review of registration statements filed by EGCs. In general, the comments ask EGCs to: (i) indicate on the cover of their registration statement that the company is an EGC; (ii) describe how and when a company may lose EGC status; (iii) briefly describe the various exemptions that are available to the company as an EGC; and (iv) indicate the company’s election under Section 107(b) of the JOBS Act with respect to whether or not to comply with new financial accounting standards on the same time-table as reporting companies that are not EGCs, rather than taking advantage of the longer phase-in periods that may be available pursuant to Section 102(b) of the JOBS Act.
In addition, the SEC is asking EGCs that have opted out of the extended transition period for complying with new or revised accounting standards as permitted under Section 102(b) of the JOBS Act to state in their registration statement that the election is irrevocable. For those EGCs that do not opt out, the SEC is requesting that a risk factor, and a similar statement in the critical accounting policy disclosures, be included:
“explaining that this election allows [the company] to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies … [and] that, as a result of this election, [the company’s] financial statements may not be comparable to companies that comply with public company effective dates.”
The SEC’s comments appear to have generated little, if any, controversy. Interestingly, a number of EGCs that have responded to comment letters have opted out of the extended transition period for complying with new or revised accounting standards. Furthermore, a number of companies have also opted out of taking advantage of the reduced disclosure requirements for EGCs relating to executive compensation and the available exemptions from requirements relating to say-on-pay. It will be interesting to see whether opting out will continue as a trend or whether it is the result of companies having been prepared to become public under the pre-emerging growth company rules