The new JOBS Act (Jumpstart Our Business Startups Act), a package of bills aimed at providing easier access to capital for new and emerging companies, was signed into law by President Obama. Although the “crowd-funding” provisions of the JOBS Act have been widely reported, one of the more helpful capital-raising provisions of the JOBS Act may prove to be the so-called “on-ramp” provisions designed to allow easier access to the IPO market for emerging growth companies (EGCs), private companies with total annual gross revenues of less than $1 billion in their last fiscal year. Title I of the JOBS Act, which is effective now, reduces the disclosure, reporting and regulatory burdens under federal securities that would otherwise apply to an EGC in the registration process and for a transition period of up to five years thereafter.
On April 16, 2012, the SEC published Jumpstart Our Business Startups Act Frequently Asked Questions to address issues arising under Title I.
The relaxed requirements applicable to EGCs under Title I include the following:
“Test the Waters” Communications. EGCs may engage in “test the waters” communications, either before or after the filing of a registration statement, with qualified institutional buyers and accredited investors, as defined by the SEC, to determine whether such investors have an interest in a contemplated registered offering. Traditionally, such activities were prohibited as “gun-jumping” under federal securities laws.
Confidential SEC Filing. An EGC may file the registration statement and amendments for its IPO on a confidential basis with the SEC, provided that the registration statement and all other submissions are publicly filed with the SEC at least 21 days before the start of the road show. This would allow an EGC to resolve any accounting or disclosure issues that arise in the SEC review process without public scrutiny.
Reduced Audited Financial Statement Requirements. Under Title I, as clarified by the FAQs:
- in an IPO registration statement, EGCs are permitted to provide only two years of audited financial statements (instead of three years which are now generally required) and to provide selected financial data only as far back as the earliest audited period presented (instead of five years); and
- in subsequent registration statements, EGCs would not be required to present full audited or selected financial statements for any period prior to the earliest period presented in the IPO registration statement.
Compliance with New Accounting Pronouncements and Rules. EGCs may not be required to comply with any new or revised financial accounting standards until private (non-reporting) companies are required to comply. Further, any rules adopted in the future by the PCAOB requiring auditor rotation or an auditor’s discussion and analysis would not apply to an EGC and any other new PCAOB rules would not apply unless the SEC determines that it is necessary or appropriate in the public interest, considering the protection of investors and whether the action will promote efficiency, competition and capital formation.
No Internal Control Attestation by Auditor. EGCs are excused from having to provide the costly internal control attestation by the independent auditor required by Section 404(b) of the Sarbanes-Oxley Act. Reduced Executive Compensation Disclosures. EGCs are permitted to provide the same reduced executive compensation disclosures in their registration statements and proxy statements that smaller reporting companies are currently permitted to provide. Generally, this means that EGCs will not be required to provide the compensation discussion and analysis and will only be required to provide limited compensation data for three executive officers (instead of five) for two years (instead of three).
No Say on Pay Votes. EGCs are excused from having to provide a “say on pay,” “say on frequency” and “say on golden parachute” votes to their shareholders.
Relaxation of Rules Applicable to Brokers. Title I permits brokers to publish research reports about an EGC during a proposed public offering, even if that broker is participating in the offering. Further, the law relaxes restrictions on communications involving securities analysts in the initial public offering of an EGC.
EGC Status. The FAQs clarify that the $1 billion “total annual gross revenues” is based on the company’s total revenues as presented on its income statement under GAAP (or IFRS if used by a foreign private issuer). A company that sold common equity under a registration statement on or prior to December 8, 2011 is not eligible for EGC status. The FAQs note that this includes primary sales of equity by the company as well as sales to employees on Form S-8 or sales by a selling shareholder under a resale registration statement.
A company that is an EGC will retain that status until the earliest of:
- the last day of the fiscal year in which the company has annual gross revenues of $1 billion or more;
- the last day of the fiscal year following the fifth anniversary of the company’s IPO;
- the date on which the company has issued more than $1 billion in non-convertible debt during the previous three-year period (the FAQs clarify that this is a rolling three year period and that “non-convertible debt” means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not); and
- the date that the company became a “large accelerated filer” with a public float of $700 million or more.
As noted above, Title I is effective now. The SEC will need to amend its rules and forms to reflect the changes effected by Title I; however, the FAQs note that the provisions of Title I supersede, in relevant part, conflicting rules and regulations.
The effect of Title I should be to make “going public” a more attractive option to entrepreneurs seeking to raise capital or obtain liquidity by reducing the costs, burdens and disclosures involved in the registration and reporting process.