On April 16, 2012, the Securities and Exchange Commission released new "Frequently Asked Question" 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.
You can find a complete copy of the new FAQ release here.
Guidance on Determining EGC Status
- In determining whether it has less that US$1 billion in "total annual gross revenues," an issuer should interpret that phrase to mean "total revenues" as presented on an income statement under US GAAP (or IFRS for foreign issuers using those standards).
- For foreign private issuers reporting in a currency other than US dollars, the calculation should be made using the exchange rate on the last day of the issuer's most recently completed fiscal year.
- The JOBS Act states that an issuer cannot qualify as an EGC if its first sale of common equity securities occurred on or before December 8, 2011. Importantly, this is not limited to sales pursuant to an IPO, and includes sales made under an employee benefit plan registered on Form S-8 and secondary sales made by selling stockholders on a resale registration statement, among others.
- In order for an issuer to use the confidential submission process or engage in "test the waters" communications, it must qualify as an EGC at the time it makes its initial confidential submission to the SEC or engages in such communications, as applicable. If an issuer subsequently loses EGC status, it must publicly file a registration statement to continue its review process; however, the SEC will not view any prior "test the waters" communications by such an issuer as "gun jumping" violations.
- An EGC should identify itself as such on the cover page of its prospectus.
- The JOBS Act states that an issuer loses EGC status on the date on which it has issued more than US$1 billion in non-convertible debt in the previous three years. The FAQ clarifies that this refers to any rolling three-year period and not to calendar year or fiscal year periods. Further the FAQ clarifies that "non-convertible debt" means "any non-convertible security that constitutes debt, whether or not issued in a registered offering." This makes clear that bank debt and syndicated loans are not included in this calculation. However, the FAQ does not address how the calculation treats refinancings, particularly debt issued in a registered exchange offer for private placed debt.
Guidance on the Reduced Disclosure Required of EGCs (referred to in the FAQ as "scaled disclosure")
- An issuer's status at the time of its first public filing will determine the required content of the applicable registration statement. Therefore, an issuer that is an EGC at its first public filing can avail itself of scaled disclosure throughout the registration process, even if it loses EGC status prior to effectiveness. This applies only to the initial public filing of a registration statement and not the initial confidential submission.
- An EGC that already began the registration process prior to April 5, 2012 (the date that the JOBS Act was signed into law) may begin using scaled disclosure in an amendment to its registration statement. Similarly, an EGC that completed its IPO after December 8, 2011, and before April 5, 2012, may file its next periodic report using scaled disclosure. Note that this FAQ does not provide this flexibility to issuers who either filed or completed their IPO after April 5, 2012, notwithstanding that this guidance was not previously available.
- An EGC is allowed to selectively adopt portions of the scaled disclosure provisions (vs. "all-or-nothing" compliance). The only exception is the extended transition period for new or revised accounting standards, which requires that the issuer adopt all or none of these standards.
Guidance for Foreign Private Issuers and Canadian Issuers
- A foreign private issuer may avail itself of scaled disclosure notwithstanding the fact that the JOBS Act only explicitly references Regulation S-K and not Form 20-F.
- SEC rules already permitted certain foreign private issuers to submit their registration statements confidentially. The FAQ notes that where such a foreign private issuer is an EGC and avails itself of any other benefits afforded to an EGC, then it will have to publicly file all the confidential submissions within the time period required for EGCs (i.e., 21 days before the beginning of a road show). If such a foreign private issuer does not avail itself of any of these benefits, it could continue to use the current process where a filing is often made immediately before the road show.
- A Canadian issuer filing under the Multi-Jurisdictional Disclosure System can qualify as an EGC and avail itself of certain benefits afforded to EGCs, although its disclosure requirements would still be determined by its home country standards.
Guidance Regarding Financial Statement Requirements for EGCs
- An EGC that only presents two years of audited financial statements in its IPO registration statement similarly only has to present two years of selected financial data. This clarifies some confusing language in the JOBS Act that suggested the relief for selected financial data did not apply to IPO registration statements.
- The JOBS Act provides an issuer the flexibility to file two years of audited financial statements only in its registration statement for an initial public offering. In the FAQ, the SEC states that it will not object if, in its other registration statements, an EGC does not present audited financial statements for periods earlier than the earliest audited period in its IPO registration statement. The FAQ does not address whether an EGC would get similar relief in a registration statement it files prior to filing for its IPO; for example, in the case of an issuer filing a registered exchange offer for debt securities.
- Where an EGC has to provide financial statements for entities other than itself (e.g., acquired companies), it may elect to provide only two years of financial statements for these entities, even where the rules would otherwise require three years of financial statements.
- An EGC that intends to take advantage of the extended transition period for adopting new or revised accounting standards should notify the SEC of that election when it makes its first confidential submission. An EGC that is already in registration or that is already a public filer should make and disclose that election in the next amendment to its registration statement or its next periodic report. Once made, this election is irrevocable.
- If an EGC elects to take advantage of the extended transition period for adopting new or revised accounting standards, it must state, for each applicable standard, the date the standard becomes applicable to non-EGCs and the date it will become applicable to the issuer, assuming it remains an EGC.
Guidance on Certain Transitional Issues
- Where the disclosure standards for EGCs under the JOBS Act conflict with existing Regulation S-K or Regulation S-X, the FAQ states that the JOBS Act supersedes existing rules and regulations.
- However, the FAQ also states the SEC's view that compliance with Sections 102(c) and 103 of the JOBS Act is consistent with the requirements for annual and periodic reporting under Sections 13(a) and 15(d) of the Exchange Act, and it further notes that an EGC's CEO and CFO are required to certify that the EGC's periodic report complies with the requirements of Sections 13(a) and 15(d).
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© 2012 White & Case LLP