By Andrea Schmidt
This Client Update is the second segment in a three-part series on the new Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). This update focuses on streamlined initial public offering and reporting requirements for a newly created category of "emerging growth companies," as well as the increase in the cap for Regulation A offerings from $5 million to $50 million. Part 1, available here, described the JOBS Act "crowdfunding" exemption, a new registration exemption for the offer or sale of securities by an issuer where the amount sold does not exceed $1 million in a 12-month period. Part 3 will cover the increased thresholds for registration under the Securities Exchange Act of 1934.
Streamlining for Emerging Growth Companies
What Is an "Emerging Growth Company"?
An emerging growth company is a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year. The definition excludes any company that completed the first public sale of its common equity on or before December 8, 2011. A company retains its status as an emerging growth company until the earlier of:
- The last day of the fiscal year in which its annual gross revenues exceed $1 billion;
- The last day of the fiscal year following the fifth anniversary of the company's IPO;
- The date on which the company has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or
- The date on which the company is first deemed a "large accelerated filer."
What Exemptions Are Available to Emerging Growth Companies?
Emerging growth companies will enjoy exemptions from certain federal securities regulations intended to ease the burden of the initial public offering process and reduce disclosure requirements under the Exchange Act for qualifying companies. The exemptions are effective and available for use immediately. They are also generally available to foreign issuers as well as domestic issuers.
Initial Public Offering Process Exemptions
Two Years of Audited Financial Statements. Emerging growth companies are only required to present two (rather than three) years of audited financial statements, selected financial data and related MD&A disclosure in their IPO registration statements.
Reduced Executive Compensation Disclosure. An emerging growth company can comply with its executive compensation disclosure obligations in its IPO registration statement by satisfying the reduced requirements applicable to smaller reporting companies under Item 402 of Regulation S-K.
Confidential Submission of IPO Registration Statements. An emerging growth company can confidentially submit its registration statement and any amendments to the Securities and Exchange Commission for confidential review prior to its IPO. The initial submission and subsequent amendments must be publicly filed with the SEC at least 21 days prior to any road show for the offering.
Eased Restrictions on Pre-offering Communications with Institutional Accredited Investors and Qualified Institutional Buyers. Emerging growth companies can communicate with institutions that are accredited investors and qualified institutional buyers to "test the waters" and determine whether interest exists prior to proceeding with an offering.
Public Company Reporting Exemptions
No Say-on-Pay. Emerging growth companies are not required to provide shareholders with the newly implemented advisory votes on executive compensation or golden parachute compensation. Once a company ceases to qualify as an emerging growth company, it must begin to hold say-on-pay votes (a) three years after losing that status if it was an emerging growth company for less than two years after completing its IPO; or (b) one year after losing that status if it was an emerging growth company for more than two years following its IPO.
No Pay-for-Performance or CEO Pay Ratio Disclosures. Emerging growth companies need not provide disclosure of the relationship between executive compensation and financial performance of the company, or disclosure of the ratio between the annual total compensation of the CEO and the median of the annual total compensation.