Now that both the House and the Senate have passed the Jumpstart Our Business Startups Act (the “JOBS Act”), and as it awaits President Obama’s signature, let’s take a look at what we actually ended up with. I’m going to break this post down into several parts addressing:
- the newly created category of emerging growth companies;
- the new research report and communications rules related to emerging growth companies;
- the amendments eliminating the prohibitions on general solicitation and general advertising in Rule 144A and Regulation D, Rule 506 offerings and adding the platform exemption from broker-dealer registration;
- the crowdfunding exemption;
- the amendments to Section 12(g) (formerly the 500 shareholder rule).
We’ll start with a straightforward look at what’s in the bill, and then come back to the good, the bad and the ugly.
This first post addresses the newly created category of emerging growth companies:
What is an Emerging Growth Company?
An “emerging growth company” is a company that had total annual gross revenues of less than $1 billion in its most recently completed fiscal year, excluding any company that held an IPO on or before December 8, 2011.
When is a Company No Longer and Emerging Growth Company?
Once a company is an emerging growth company it will remain an emerging growth company until the earlier of the:
- the last day of the fiscal year in which it has total annual gross revenues of $1 billion or more;
- the last day of the fiscal year following the fifth anniversary of its IPO;
- the date on which it has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or
- the date on which it becomes a large accelerated filer (a company with worldwide non-affiliate market capitalization of $700 million or more, measured as of the last business day of its second fiscal quarter).
How Do Corporate Governance and Disclosure Obligations Differ for Emerging Growth Companies?
IPO Registration Statements
An emerging growth company has the ability to submit an initial draft of its IPO registration statement to the Securities and Exchange Commission for confidential nonpublic review, provided the initial draft and all amendments thereto are publicly filed at least twenty-one days in advance of the emerging growth company’s roadshow.
An emerging growth company is only required to include two years of audited financial statements in its IPO registration statement (as opposed to two years of audited balance sheets and three years of audited income and cash flows statements).
Selected Financial Data
In any registration statement or periodic or other report filed with the Commission, an emerging growth company is only required to include selected financial data that stems back as far as the earliest period covered by the audited financial statements included in its IPO registration statement (as opposed to selected financial data that stems back five years, or such shorter period as the company may have been in existence).
Note, however, that if an emerging growth company is also a smaller reporting company then it will be exempt from providing any selected financial data at all (as has always been the case for smaller reporting companies under the scaled disclosure requirements).
A “smaller reporting company” is a company with a worldwide non-affiliate market capitalization of less than $75 million, measured as of the last business day of its second fiscal quarter, or, in the case of an IPO, measured as of a date within 30 days of the filing of its IPO registration statement. Alternatively, where a company has no market capitalization, it may still qualify as a smaller reporting company if it had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.
An emerging growth company is only required to provide information in it management’s discussion and analysis of financial condition and results of operations (“MD&A”) that stems back as far as the earliest period covered by the audited financial statements included in its IPO registration statement.
An emerging growth company is only required to provide the scaled version of executive compensation disclosure that smaller reporting companies provide.
An emerging growth company is not required to comply with any new or revised accounting standards that are applicable to both public and private companies until the date on which private companies are required to comply with the accounting standards.
An emerging growth company is not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, however is still responsible for establishing, maintaining and assessing internal controls over financial reporting.
In the event that the PCAOB adopts rules requiring mandatory audit firm rotation or inclusion of an auditor’s discussion and analysis in a company’s audit report, emerging growth companies will not be required to comply with these requirements.
What’s more, any other rules adopted by the PCAOB after the JOBS Act is enacted will not apply to emerging growth companies unless the Commission determines that their application is necessary or appropriate in the public interest, after taking into consideration investor protection and whether application of such rules would promote efficiency, competition and capital formation.
Say on Pay, Say on Frequency and Say on Golden Parachute Votes
An emerging growth company is not required to hold shareholder advisory votes on executive compensation (“Say on Pay”), shareholder advisory votes on the frequency (“Say on Frequency”) of Say on Pay votes or shareholder advisory votes on golden parachute compensation in connection with a merger, acquisition or other similar transaction (“Say on Golden Parachutes”).
Once a company is no longer an emerging growth company:
- if it was an emerging growth company for less than two years following its IPO, then it must hold its first Say on Pay and Say on Frequency votes, and, if applicable, Say on Golden Parachute vote, within three years of graduating from emerging growth company status;
- if it was an emerging growth company for more than two years following its IPO, then it must hold its first Say on Pay and Say on Frequency votes, and, if applicable, Say on Golden Parachute vote, within one year of graduating from its emerging growth company status.
Pay-for-Performance and Pay Equity
An emerging growth company is not required to disclose the relationship between executive compensation and financial performance (“Pay-for-Performance”), or the annual total compensation of it CEO, the median of the annual total compensation of all other employees and the ratio between the two numbers (“Pay Equity”).
Both the Pay-for-Performance and the Pay Equity disclosure requirements were added to the Securities Exchange Act by the Dodd-Frank Act, but the Commission has not yet proposed implementing rules.
Opting In & Out
Finally, other than with respect to the accounting standards, an emerging growth company may elect to forgo some or all of the scaled corporate governance and disclosure provisions and instead comply with the requirements applicable to non-emerging growth companies.
As far as accounting standards are concerned, an emerging growth company must notify the Commission in conjunction with the filing of its initial registration statement as to whether it will take advantage of the extended period for complying with any new or revised accounting standards. When an election is made it is with respect to all new or revised accounting standards (there’s no choosing to comply with some and electing an extension for others). Still, if an emerging growth company initially chooses to take advantage of the extended compliance period, it can always change its mind later. However, after an emerging growth company has elected to forgo the extended compliance period that election is irrevocable.
Update April 18, 2012:
On Monday the Division of Corporation Finance released a set of FAQs discussing the general applicability of the JOBS Act to emerging growth companies.
Update May 3, 2012:
The Division of Corporation Finance released a second set of FAQs discussing the general applicability of the JOBS Act to emerging growth companies.