On May 3, 2012, the Securities and Exchange Commission released new "Frequently Asked Questions" guidance on interpreting the provisions of Title I of the JOBS Act. This is the portion of the JOBS Act that implements different offering, disclosure and other requirements applicable to Emerging Growth Companies ("EGCs"). We provide a few brief observations on the new guidance below, which encompasses Questions 18 – 41 from the SEC release that you can access here.
Determining EGC Status
- EGCs that issue more than US$1 billion in debt securities over a three-year period will lose their EGC status. Debt issued as part of an "A/B" or "Exxon Capital" exchange offer (typically in connection with a high-yield offering) is not counted when determining whether a company has exceeded this threshold.
- Asset Backed Securities issuers and Investment Companies required to register under the Investment Company Act cannot qualify as Emerging Growth Companies. However, Business Development Companies can qualify as Emerging Growth Companies.
- An issuer that exceeded US$1 billion in revenue at one point in its history, but that had less than US$1 billion for the fiscal year immediately prior to filing its registration statement, can qualify as an Emerging Growth Company, because the definition only looks at revenues for the most recently ended fiscal year.
- In determining EGC status, a financial institution may calculate its total annual gross revenues using the same standard used to calculate revenues to determine smaller reporting company status under Exchange Act Rule 12b-2, as described in Section 5110.2(c) of the Financial Reporting Manual.
- A successor to an issuer's Exchange Act reporting obligations may not become an EGC if the predecessor conducted its first registered sale of common equity on or before December 8, 2011.
- A company that issued registered debt securities (but not registered equity securities) on or prior to December 8, 2011 may still qualify as an EGC.
- An issuer cannot regain EGC status once it has terminated (e.g., due to exceeding US$1 billion in revenue, becoming a large accelerated filer or issuing more than US$1 billion in debt securities).
- The FAQ clarifies the language used in the provision for terminating EGC status on the "last day of the fiscal year of the issuer following the fifth anniversary" of its IPO. That date is the last day of the fiscal year in which the fifth anniversary falls.
- The SEC will publicly release its comment letters and issuer responses for confidentially submitted registration statements within 20 business days of effectiveness (which is the same as for publicly filed registration statements). The SEC asks EGCs to file on EDGAR all response letters as correspondence files when it makes its initial public filing.
- With regard to confidential treatment for information in response letters, an EGC should either follow the Rule 83 procedures at the time it makes the confidential submission, or it should alert the SEC at that time and follow the Rule 83 procedures when it first files publicly.
- Emerging Growth Companies must comply with XBRL requirements.
- An EGC may use the confidential submission process for an "A/B" or "Exxon Capital" registration statement filed on Form S-4 or F-4, provided it has not yet completed its IPO. Note that certain other EGC benefits, notably the ability to use scaled disclosure, do not apply to these registration statements.
- In registration statements that require the presentation of the ratio of earnings to fixed charges, an EGC does not need to provide this ratio for periods before the earliest period for which it provides selected financial data.
- An EGC must provide three years of audited financial statements in its Form 10-K or 20-F (unless it is a smaller reporting company). The SEC notes that this should not result in an EGC having to provide audited financials for periods earlier than those presented in its IPO registration statement.
- If an EGC discovers a material error and restates its financials during the confidential submission process, it must still include the restatement disclosures in its financial statements until they are updated for its next annual period.
- IFRS requires first-time adopters and issuers retroactively applying an accounting policy to provide three statements of financial position (effectively, balance sheets looking back three years). An EGC that is required under IFRS to prepare these three statements of financial position must include them in its registration statement notwithstanding that it otherwise only has to include two years of audited financials.
- In preparing its MD&A, an EGC that is not a smaller reporting company may not avail itself of the relief offered to smaller reporting companies, other than the ability to prepare only two years of MD&A if it also only provides two years of audited financial information. As a practical matter, this means an EGC still has to prepare a contractual obligations table.
New or Revised Accounting Standards
- EGCs can enjoy an extended transition period before complying with "new or revised" financial accounting standards. The FAQs defines these to be any update issued by the Financial Accounting Standards Board to its Auditing Standards Codification after April 5, 2012. The SEC has been asking EGCs conducting IPOs to state affirmatively whether they intend to take advantage of the extended compliance period.
- Foreign private issuers that provide a US GAAP reconciliation can take advantage of the extended transition period when preparing those reconciliations.
- EGCs must comply with financial accounting standards that exclude "non-public entities" from their scope.
- Foreign private issuers that are EGCs may not apply any non-US accounting standards limited to use by non-public entities. Similarly, they may not report under IFRS for Small and Medium Sized Entities.
- An EGC that elects to adopt the extended transition period for compliance with new or revised accounting standards may change that election and begin complying with those standards prior to the termination of its EGC status. However, it has to make this election with regard to all such standards, and the election is irrevocable.
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© 2012 White & Case LLP