Confidential IPO filings have become the new normal for a large percentage of our S-1 clients in 2014. The JOBS Act gave this “elbow room” to any company defined as an Emerging Growth Company. Recently, we had a client that was not actually sure IF they qualified as an EGC.
A corporate issuer qualifies as an emerging growth company if its total gross revenues were less than $1 billion (or the foreign currency equivalent, calculated on the basis of U.S. GAAP or IFRS) during its most recently completed fiscal year. Qualification as an emerging growth company is available to both U.S. issuers and foreign private issuers.
An issuer will maintain its emerging growth company status until the earliest of:
- The end of the fiscal year during which its total gross revenues exceed $1 billion
- The end of the first fiscal year after the fifth anniversary of its IPO
- The date on which it will have issued more than $1 billion in non-convertible debt during the previous three-year period
- The date on which it becomes a “large accelerated filer,” which generally refers to an issuer that: a.) had an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of its most recently completed second fiscal quarter; b.) has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months; c.) has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act; and d.) is not eligible to use the requirements for “smaller reporting companies” for its annual and quarterly reports.
Accommodations for Emerging Growth Companies
The JOBS Act provides emerging growth companies with various accommodations, including relaxed disclosure, corporate governance, accounting and auditing requirements. The following summarizes the key JOBS Act accommodations for emerging growth companies.
In an IPO, an emerging growth company is only required to present two years (instead of three years) of audited financial statements in its IPO registration statement. Furthermore, for later registration statements or periodic reports filed under the Exchange Act, an emerging growth company will not be required to present selected financial data as required by Item 301 of Regulation S-K for any period prior to the earliest audited period presented in its IPO registration statement.
Significantly, emerging growth companies are only required to comply with the scaled executive compensation disclosure requirements that apply to smaller reporting companies under Item 402 of Regulation S-K. For example, an emerging growth company is not required to include a Compensation Discussion and Analysis in its proxy statements. In addition, emerging growth companies will not have to comply with the “pay-for-performance” and “CEO pay ratio” disclosure rules required to be adopted by the SEC under Section 953 of the Dodd-Frank Act.
Although the JOBS Act exempts emerging growth companies from providing the disclosures listed above, emerging growth companies may nevertheless wish to include such disclosures for commercial or competitive reasons, or to ensure that the absence of such disclosures does not render existing disclosure misleading.
An emerging growth company is not required to have its independent registered public accounting firm provide an attestation report on the company’s internal control over financial reporting, as required by Section 404(b) of the Sarbanes-Oxley Act. Emerging growth companies are also exempt from the requirement to hold a shareholder advisory vote on executive compensation (say-on-pay) or shareholder advisory vote on golden parachute compensation at any shareholders’ meeting to approve a merger or similar transaction.
Accounting and Auditing Requirements
Emerging growth companies are not required to comply with any new or revised financial accounting standard until a private company would be required to comply with the standard. Emerging growth companies also will not be required to comply with PCAOB rules adopted after the enactment of the JOBS Act, unless the SEC determines otherwise.
On December 17, 2012, the SEC determined that new PCAOB rules for improving communications between auditors and audit committees should apply to emerging growth companies. In its approval order, the first to address application of new PCAOB rules to emerging growth companies, the SEC stressed that the JOBS Act did not establish a “presumption” that new PCAOB rules should not apply to emerging growth companies. Rather, the SEC may require an emerging growth company to comply with a new PCAOB rule whenever the SEC finds that compliance is necessary or appropriate in the public interest, after considering the protection of investors and whether the rule will promote efficiency, competition and capital formation.
The JOBS Act softens restrictions on communications between securities analysts and potential investors and between securities analysts and the management of an emerging growth company. Emerging growth companies are allowed greater flexibility to communicate with potential institutional investors about a securities offering both before and after the filing of the registration statement so that the company can “test the waters” to determine investor interest in the securities offering. These “test the waters” communications must be limited to institutional investors that are either “qualified institutional buyers” or “accredited investors.” Qualified institutional buyers or “QIBs” are defined generally as institutions that own and invest at least $100 million in securities on a discretionary basis. In general, for an entity to be considered an accredited investor, it must have total assets in excess of $5 million.
The JOBS Act makes it easier for brokers and dealers to provide research coverage of an emerging growth company, even if participating in the company’s registered equity offering, by allowing the broker or dealer to publish and distribute research reports about the emerging growth company and its securities both before and after the filing of the registration statement without violating the gun-jumping rules under Section 5 of the Securities Act.
In an IPO, an emerging growth company is permitted to submit drafts of its IPO registration statement and amendments confidentially to the SEC so long as they are filed publicly 21 days before the company conducts a road show. Confidential treatment extends to all correspondence related to the SEC’s review of the IPO registration statement and amendments.
In addition to the emerging growth company accommodations described above, Title I of the JOBS Act directs the SEC to review Regulation S-K to determine how to modernize and simplify the registration process and reduce the burdens on emerging growth companies. The JOBS Act directs the SEC to provide a report to Congress by October 2, 2012 containing its specific recommendations on improving the registration process. As this handbook goes to publication, the SEC had not yet provided this report to Congress.
Have a great day.