On April 16, the Division of Corporation Finance of the Securities and Exchange Commission published an additional set of frequently asked questions (FAQs) regarding Title I of the Jumpstart Our Business Startups Act (JOBS Act), which was enacted on April 5. Title I of the JOBS Act includes reforms intended to facilitate capital raising by “emerging growth companies” (EGCs), such as allowing EGCs to submit draft registration statements on a confidential basis to the SEC. Title I of the JOBS Act became operative upon enactment.
Which companies can qualify as EGCs?
An EGC is defined under securities laws as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year. The FAQs make clear that the phrase “total annual gross revenues” means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS, if applicable). If the financial statements for the most recent year included in the registration statement 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.
An issuer is not an EGC if the first sale of common equity securities of such issuer pursuant to an effective registration statement occurred on or before December 8, 2011. According to the FAQs, the phrase “first sale of common equity securities” includes a company’s initial primary offering of common equity securities for cash as well as an offering of common equity pursuant to an employee benefit plan or a selling shareholder’s secondary offering on a resale registration statement. Even if the issuer had a registration statement declared effective on or before December 8, 2011, so long as the first sale of common equity securities occurs after December 8, 2011, an issuer may qualify as an EGC.
The FAQs state that the SEC will apply the following general principles for determining EGC status:
- A company must qualify as an EGC at the time of submission in order to submit a confidential draft registration statement, or any amendment thereto. If a company ceases to qualify as an EGC while undergoing the confidential review of its draft registration statement, it would need to file a registration statement to continue the review process and comply with current rules and regulations applicable to companies that are not EGCs.
- A company’s status at the time of the initial filing date of its registration statement (not the date of the initial confidential draft submission) will determine the requirements for the contents of that registration statement. If a company files its registration statement at a time when it qualifies as an EGC, the disclosure provisions for EGCs would continue to apply 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 at a time 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.
- A company would need to determine whether it qualifies as an EGC at the time it engages in “test-the-waters” communications pursuant to Section 5(d) of the Securities Act of 1933.
How should an EGC make its filings with the SEC?
The FAQs provide that the issuer should disclose that it is an EGC on the cover page of its prospectus. An issuer that qualifies as an EGC may amend its registration statement (in a pre-effective amendment to a pending registration statement or in a post-effective amendment) to provide the scaled disclosure available to EGCs if the registration statement was initially filed prior to April 5 (the date of enactment of Title I of the JOBS Act). An EGC that completed its initial public offering after December 8, 2011 and prior to April 5 may file its next periodic report using the scaled disclosure provisions in Title I. Other than for certain specified purposes, an EGC is permitted to decide to follow only some of the scaled disclosure provisions for EGCs.
The SEC will not object if a foreign private issuer that qualifies as an EGC complies with the scaled disclosure provisions available to EGCs to the extent relevant to the form requirements for foreign private issuers, but if the foreign private issuer chooses to take advantage of any benefit available to EGCs, then it will be treated as an EGC and will be required to publicly file its confidential submissions at least 21 days before its road show.
What are the financial statement disclosure requirements applicable to EGCs?
Title 1 provides that an EGC need not present more than two years of audited financial statements in a registration statement for an initial public offering of its common equity securities. According to the FAQs, the SEC will not object if an EGC presenting two years of audited financial statements in its initial public offering registration statement limits the number of years of selected financial data under Item 301 of Regulation S-K to two years as well. The SEC will also not object if, in subsequent registration statements, an EGC does not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities.
Title 1 provides that an EGC must choose whether it will take advantage of its EGC status for purposes of its financial statements at the time the company is first required to file a registration statement, periodic report, or other report with the SEC and to notify the SEC of such choice. An EGC should notify the SEC of its choice in its initial confidential submission, as that choice will inform the SEC’s review of the financial statements in the draft registration statement. EGCs that currently are in registration or are subject to Exchange Act reporting should make and disclose their choice in their next amendment to the registration statement or in their next periodic report. In addition, for any recently issued accounting standard that will apply to its financial statements, an EGC that chooses to take advantage of the extended transition period for complying with new or revised accounting standards should disclose the date on which adoption is required for non-EGCs and the date on which the EGC will adopt the recently issued accounting standard, assuming it remains an EGC as of such date.
Finally, the FAQs provide that if an EGC is filing a registration statement that includes other entities, and securities laws require disclosure of three years of financial statements for such other entities, the SEC will not object if the EGC presents only two years of financial statements for these other entities in its registration statement.
Click here to view the complete text of the April 16 FAQs.