On May 2, 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?
Total annual gross revenues for the most recently completed fiscal year is used to determine whether a company qualifies as an EGC. The calculation of total annual gross revenues of a financial institution includes gross revenues of traditional banking activities but not gains and losses on dispositions of investment portfolio securities (consistent with the approach set forth in Securities Exchange Act Rule 12b-2 for determining smaller reporting companies).
In general, all non-convertible debt securities issued over the prior three-year period, whether outstanding or not, count towards the $1 billion debt limit for purposes of determining whether a company has lost its ECG status. An issuer is not required to count debt securities issued in an A/B debt exchange offer; only the initial placement under Rule 144A is counted.
The effective date of the definition of ECG focuses on whether the first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011. Accordingly, a sale of debt securities pursuant to an effective registration statement would not affect an issuer’s qualification as an ECG. Also, an ECG may use the confidential submission process to submit a draft registration statement for an A/B debt exchange offer on Form S-4 or on Form F-4, so long as the company’s initial public offering of common equity securities has not yet occurred.
If no other disqualifying condition occurs earlier, an issuer will lose its ECG status on the last day of the year which included the fifth anniversary of the first sale of common equity securities pursuant to an effective registration statement. An issuer may not regain ECG status after losing it pursuant to the disqualification provisions of the Securities Act of 1933.
If a predecessor is not eligible to be an ECG because its first sale of common equity securities occurred on or before December 8, 2011, then its successor is also not eligible. Neither an asset-backed securities issuer nor an investment company registered under the Investment Company Act may qualify as an ECG. However, because business development companies (investment companies that are not required to register under the Investment Company Act but are regulated pursuant to Sections 55 through 65 of the Investment Company Act) are generally subject to the disclosure and other requirements exempted by Title I, they can qualify as an ECG.
How should an EGC make its filings with the SEC?
The SEC will publicly release its comment letters and issuer responses no earlier than 20 business days following the effective date of the registration statement. Although confidential treatment will be afforded to response letters, an ECG should identify information for which it intends to seek confidential treatment under the procedures of Rule 83 upon public filing of its response letters on EDGAR.
An ECG that is not also a smaller reporting company is not permitted to comply with the smaller reporting company version of management’s discussion and analysis, despite the fact that an ECG is expressly permitted to comply with the smaller reporting company version of compensation disclosures under Regulation S-K,
What are the financial statement disclosure requirements applicable to EGCs?
EGCs must comply with XBRL requirements.
For an ECG that is not a smaller reporting company, three years of audited financial statements are required to be included in the company’s Form 10-K or Form 20-F. An ECG will only be required to include two years of audited financial statements in its registration statement for its initial public offering of common equity securities and its first Form 10-K or Form 20-F following such initial public offering will only be required to include the earliest audited period presented in connection with its initial public offering. An ECG may present its earnings to fixed charges for the same number of years for which it provides selected financial data disclosures in a registration statement.
An ECG can take advantage of an extended transition period for complying with any “new or revised” financial accounting standard, where “new or revised” accounting standard refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after the effective date of the JOBS Act.
If a foreign private issuer that reconciles its home country GAAP financial statements to U.S. GAAP otherwise qualifies as an ECG, the foreign private issuer may take advantage of the extended transition period for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation.
ECG companies that choose to take advantage of the extended transition period for complying with any new or revised financial accounting standard must still comply with those accounting standards that exclude from their scope nonpublic entities.
If an ECG initially decides to take advantage of the extended transition period for complying with new or revised financial accounting standards, it may later decide to opt in and comply with the financial accounting standard effective dates applicable to non-EGCs. Any decision to opt in should be prominently disclosed in the first periodic report or registration statement following the company’s decision; the disclosure should state that such decision is irrevocable.
An ECG is required to include any restatement disclosures in its financial statements until its financial statements are updated for the next annual period.
Notwithstanding Section 7(a)(2)(A) of the Securities Act of 1933 which allows an ECG to only include two years of audited financial statements in its registration statement for its initial public offering, an ECG that is a first-time adopter of IFRS must still comply with Paragraphs 6 and 21 of IFRS 1, First-time Adoption of International Financial Reporting Standards, and present the required three statements of financial position.
Click here to read the FAQs.