On April 16, 2012, the Securities and Exchange Commission published a third set of Frequently Asked Questions, or FAQs, providing guidance on interpreting the provisions of Title I of the JOBS Act (Jumpstart Our Business Startups Act). This portion of the JOBS Act covers, among other things, scaled disclosure requirements for Emerging Growth Companies, or EGCs.
An EGC is defined in the JOBS Act as a company with less than $1 billion in total annual gross revenue during its most recently completed fiscal year, other than a company that first sold common equity securities in a transaction registered with the Securities and Exchange Commission on or before December 8, 2011.
A company that qualifies as an EGC will be able to maintain that status until the earliest of:
- five years
- when annual gross revenues exceed $1 billion
- when the issuer has issued more than $1 billion of non-convertible debt in a three-year period, or
- the date on which the issuer is deemed to be a “large accelerated filer” as defined in the rules promulgated under the Exchange Act
Determining EGC Status
In determining whether an issuer has met the $1 billion revenue threshold, “total annual gross revenues” means total revenues as presented on the income statement under U.S. GAAP (or, for foreign private issues, the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board). Where applicable, issuers should take into account predecessors’ revenues when determining if the issuer meets the revenue threshold.For FPIs presenting their financial statements in a currency other than U.S. dollars, the calculation should be made in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year.
An issuer’s “first sale of common equity securities” is not limited to its IPO, but also includes offerings of common equity pursuant to an employee benefit plan registered on Form S-8 as well as secondary sales made by selling shareholders on a resale registration statement.
When determining whether an issuer has made its “first sale of common equity securities,” issuers should note that where an issuer’s registration statement was declared effective on, or prior to, December 8, 2011, the issuer may still qualify as an EGC so long as the first sale of common equity securities occurs after December 8, 2011.
In order for an issuer to submit a confidential draft registration statement (or amendments) or engage in test-the-waters communications, the issuer must qualify as an EGC at the time of submission, or the time it engages in test-the-waters communications, as applicable. If the issuer loses its EGC status while undergoing the confidential review, it would need to file a registration statement to continue the review using normal procedures, including filing the prior confidential draft submissions as exhibits to the filed registration statement. If an issuer loses its EGC status while engaging in test-the-waters communications, the SEC will not view the earlier communications as a violation of Section 5 of the Securities Act.
An issuer intending to qualify as an EGC should identify itself as such on the cover page of its prospectus.
The three-year period for the non-convertible debt test to determine if an issuer loses its EGC status shall be any rolling three-year period and shall not be limited to completed calendar or fiscal years. The term “non-convertible debt” shall mean any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not.
Scaled Disclosures for EGCs
Under Rule 401(a), an issuer’s status at the time of the initial filing date of its registration statement will determine the requirements for the contents of that registration statement. Thus, if a company files its registration statement when it qualifies as an EGC, it may avail itself of the scaled disclosure through effectiveness of the registration statement even if the company loses its EGC status during registration. Conversely, if a company submits a draft registration statement for confidential review when it qualifies as an EGC, but files its initial registration statement at a time when it does not qualify as an EGC, then the initial registration statement would need to comply with the requirements applicable to registration statements filed by companies that are not EGCs.
An issuer that qualified as an EGC and began the registration process prior to April 5, 2012 may provide scaled disclosures in a pre-effective or post-effective amendment to its registration statement. Similarly, an EGC that completed its IPO after December 8, 2011, and prior to April 5, 2012, may provide scaled disclosures in its future periodic reports.
An EGC may selectively choose to comply with some of the scaled disclosure provisions and some of the regular disclosure requirements. The only exception is that an EGC must comply with certain accounting standards as referenced in Section 7(a)(2)(B) of the Securities Act and Section 107(b) of the JOBS Act.
Financial Statement Requirements for EGCs
An EGC that presents only two years of audited financials in its IPO, in accordance with Section 7(a)(2)(A) of the Securities Act, may limit the number of years of selected financial data under Item 301 of Regulation S-K to two years as well.
While the provisions of Section 7(a)(2)(A) of the Securities Act permitting the filing of only two years of audited financial statement is limited to its registration statement for an IPO, the SEC will not object if, in other registration statements, an EGC does not present audited financial statements for any period prior to the earliest audited period presented in connection with its IPO.
Where an EGC has to provide financial statements of acquired companies or entities other than itself, it may provide only two years of financial statements for these entities.
Transitional Period Elections
An EGC may make an irrevocable election to not take advantage of the extended transition period for complying with new or revised accounting standards and must notify the SEC of that election in their initial confidential submission. An EGC that is already in registration or is subject to Exchange Act reporting should make and disclose the election in its next amendment to the registration statement or in its next periodic report, respectively.
An EGC electing to take advantage of the extended transition period for complying with new or revised accounting standards must disclose, for each standard applicable to its financial statements, the date on which adoption is required for non-EGCs and the date on which the EGC will adopt the applicable standard, assuming it remains an EGC as of such date.
Compliance with New Standards
Where there are conflicts between the disclosure standards for EGCs under the JOBS Act and existing form requirements (e.g., Regulation S-X or Regulation SK), an EGC should rely on, and comply with, the disclosure provisions of the JOBS Act as it supersedes existing rules and regulations. For example, although Sections 102(c) and 103 of the JOBS Act were not enacted as part of the Exchange Act, the SEC views them as superseding existing rules.
For Sarbanes-Oxley Act Section 906 certifications, full compliance with Sections 102(c) and 103 of the JOBS Act shall be viewed as being consistent with full compliance with the requirements of Sections 13(a) or 15(d) of the Exchange Act.
Foreign Private Issuers and Canadian Issuers
A FPI that qualifies as an EGC may avail itself of the scaled disclosures, to the extent relevant, despite the JOBS Act referring only to Regulation S-K and not referring to the corresponding items in Form 20-F.
Existing SEC Rules already permit an FPI to submit its registration statement confidentially, however, if an FPI qualifies as an EGC and chooses to take advantage of any benefit available to EGCs then the FPI will be required to file its confidential submission at least 21 days before the road show. If an FPI does not take advantage of any EGC benefit then it may continue to follow the Division of Corporation Finance policy on non-public submissions from FPIs.
A Canadian issuer filing under the Multi-Jurisdictional Disclosure System (MJDS) may qualify as an EGC. While the disclosure requirements for the Canadian issuer would continue to be established under its home country standards in accordance with the MJDS, other provisions of Title I, such as the test-the-waters provision in Section 5(d) of the Securities Act and the deferral of compliance with Section 404(b) of the Sarbanes-Oxley Act, would be available to an MJDS filer that qualifies as an EGC.