On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the JOBS Act) into law after the US Congress approved the bill with broad bipartisan support. This article dicusses the significant changes the JOBS Act make to US securities laws, such as easing the intial public offering (IPO) process for most US and non-US companies and altering the regulatory regime for all issuers that conduct private offerings.
As discussed in our recent Client Alerts,2 the IPO-related provisions of the JOBS Act implement the recommendations of the IPO Task Force, a national group of industry experts that presented a report to the US Department of the Treasury.
The JOBS Act makes significant changes to US securities laws to ease the IPO process for most US and non-US companies. The JOBS Act creates a new category of issuer, called an emerging growth company (each, an EGC), that benefits from a transition period, or “on-ramp,” from private to public company. During this period — which can last for up to five years — EGCs are exempt from certain costly requirements of being a public company.
The JOBS Act separately introduced other changes to US securities laws, including altering the regulatory regime for all issuers that conduct private offerings and increasing the number of shareholders that private companies may have.
Emerging Growth Company
To qualify as an EGC, a company must have annual revenue for its most recently completed fiscal year of less than $1.0 billion (and must not have priced an IPO before December 9, 2011). After the initial determination of EGC status, a company will remain an EGC until the earliest of:
- the last day of any fiscal year in which the company earns $1.0 billion in revenue;
- the date when the company qualifies as a “large accelerated filer,” with at least $700 million in public float;
- the issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities; or
- the last day of the fiscal year ending after the fifth anniversary of the IPO pricing date.
Streamlined IPO Process
The JOBS Act significantly streamlines the IPO process for EGCs, which benefit from the following changes to the IPO process:
- they may make pre-filing offers to institutional investors;
- they may initiate the registration process confidentially with the US Securities and Exchange Commission (SEC);
- they need only two, rather than three, years of audited financial statements to go public; and
- existing communications safe harbors are expanded to permit research analysts to cover EGCs sooner than was permitted under prior law and to permit additional interactions with research analysts during the IPO process.
Once public, an EGC has a limited transition period of one to five years, depending upon the size of the company, during which the regulatory requirements are scaled in order to ease the cost of compliance. During this on-ramp period, an EGC is:
- exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires auditor attestation of internal control over financial reporting;
- exempt from the detailed narrative disclosure requirements of compensation, discussion and analysis;
- exempt from the shareholder advisory voting requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (Dodd-Frank) for say-on-pay, say-onfrequency and say-on-golden-parachute votes;
- exempt from SEC rules that will implement the Dodd-Frank executive compensation disclosure provisions for the pay-for-performance graph and CEO pay ratio disclosure;
- subject to the longer phase-in periods that apply to private companies for any new or revised financial accounting standards; and
- exempt from any rules that the US Public Company Accounting Oversight Board may adopt to mandate audit firm rotation or to require the audit report to include an auditor discussion and analysis narrative.
These changes became effective immediately upon enactment on April 5, 2012 and do not require any SEC rulemaking. The SEC staff is now in the process of providing interpretive guidance on specific implementation issues.