On April 16, 2012, the SEC's Division of Corporation Finance posted new guidance regarding Title I of the Jumpstart Our Business Startups Act (the JOBS Act), which covers scaled disclosure provisions for emerging grown companies (EGCs). The following is a brief recap of the guidance provided:  

  • Whether a company meets the revenue test for an EGC of less than $1 billion total during its most recently completed fiscal year is determined by reference to the company's total revenues as shown on its income statement presented under U.S. Generally Accepted Accounting Principles (US GAAP) — or under International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), if used as the basis of reporting by a foreign private issuer. If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, this test is calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year. In addition, if the financial statements for the most recent fiscal year are those of the predecessor of the issuer, the predecessor's revenues should be used when determining if the issuer meets the definition of an EGC.
  • Section 101(d) of the JOBS Act provides that a company will not meet the definition of an EGC if the first registered sale of its common equity securities occurred on or before December 8, 2011. The phrase "first sale of common equity securities" is not limited to a sale in an IPO. It also includes common equity sold pursuant to an employee benefit plan on a Form S-8, as well as a selling shareholder's secondary offering on a resale registration statement. Even if the company had a registration statement declared effective on or before December 8, 2011, as long as the first sale of common equity occurred after December 8, 2011, a company may qualify as an EGC, assuming the other requirements of the definition are satisfied.
  • Although current SEC rules do not address when EGC status should be determined or how a company will transition in and out of EGC status, the SEC said it will apply the following principles:  
  • In order to submit a confidential draft registration statement (or amendment), a company must qualify as an EGC at the time of submission and throughout the confidential review process. If a company ceases to qualify as an EGC during the confidential review process, it must file a registration statement to continue the review process and comply with current rules and regulations applicable to non-EGC companies.
  • A company's status as an EGC at the time of filing of the registration statement, rather than the submission of the confidential draft registration statement, determines the form and contents of that registration statement. If a company is an EGC when it files the registration statement, the disclosure provisions for an EGC would continue to apply through effectiveness, even if the company loses its EGC status during registration. Conversely, if a company submits a draft registration statement for confidential review at a time when it qualifies as an EGC, but is not an EGC when it files its initial registration statement, it must comply with the requirements applicable to registration statements filed by non-EGC companies.
  • Availability of Section 5(d) "test-the-waters" communications by an EGC would be measured at the time the company engaged in the communication.  
  • An issuer must disclose that it is an EGC on the cover page of its prospectus to identify itself as an EGC.
  • If a registration statement was initially filed prior to April 5, 2012, an EGC may provide the scaled disclosure available to EGCs in a pre-effective amendment to a pending registration statement or in a post-effective amendment.
  • An EGC that completed its initial public offering after December 8, 2011 but prior to April 5, 2012 may file its next periodic report using the scaled disclosure provisions.
  • Other than the accounting standards referenced in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, and Section 107(b) of the JOBS Act, an EGC may comply with some of the scaled disclosure provisions and some of the regular disclosure requirements.
  • A foreign private issuer that qualifies as an EGC may comply with the scaled disclosure provisions to the extent relevant to the form requirements for foreign private issuers.
  • If a foreign private issuer qualifies as an EGC and is also entitled to submit its draft registration statement on a non-public basis pursuant to the Division of Corporate Finance’s policy for foreign private issuers, the foreign private issuer will be required to publicly file its confidential submissions at least 21 days before the road show if the foreign private issuer chooses to take advantage of any benefit available to EGCs.
  • An EGC need only present two years of audited financial statements and selected financial data under Item 301 of Regulation S-K in an IPO registration statement. Although the provision permitting the filing of only two years of audited financials is limited to the initial public offering registration statement, 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.
  • An EGC must make the choice to take advantage of the extended transition period at the time the company is first required to file a registration statement, periodic report, or other report with the SEC. It should notify the review staff of its choice in its initial confidential submission, however.
  • Companies may be required to present up to three years of financial statements of other entities in their registration statements, based on the significance of those entities. If the significance tests results in a requirement to present three years, the SEC will not object if the EGC presents only two years of financial statements for other entities in its registration statement.
  • An EGC may lose its EGC status on the "date on which such issuer has, during the previous three-year period, issued more than $1 billion in non-convertible debt." This three-year period covers any rolling three-year period. It is not limited to completed calendar or fiscal years. As of any date on which an issuer has issued more than $1 billion in non-convertible debt over the three years prior to such date, the issuer will lose its status as an EGC, provided that none of the other disqualifying conditions have been triggered. (Note that "nonconvertible debt" means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not.)