New JOBS Act CDIs
By Cydney Posner
Corp Fin has posted a number of new CDIs related to the JOBS Act section regarding scaled disclosure and EGCs
- Debt securities issued in an A/B debt exchange offer do not need to be counted towards the $1 billion debt limit for purposes of determining whether a company has lost its EGC status under Securities Act Section 2(a)(19)(C). Although, in general, all non-convertible debt securities issued over the prior three-year period, whether outstanding or not, are required to be counted against the $1 billion debt limit, the staff will not object if a company does not count debt securities issued in an A/B exchange offer, as these debt securities are identical to (other than the fact that they are not restricted securities) and replace those issued in the non-public offering. In effect, the staff views the A/B exchange offer as the completion of the capital-raising transaction.
- Neither an asset-backed securities ("ABS") issuer nor an investment company registered under the Investment Company Act may qualify as an EGC. However, business development companies ("BDCs"), a category of closed-end investment companies that are not required to register under the Investment Company Act but are regulated pursuant to Sections 55 through 65 of that Act, may qualify as EGCs. BDCs invest in startup and emerging growth companies for which they make available significant managerial experience, and are subject to many of the disclosure and other requirements for which Title I of the JOBS Act provides exemptions, including executive compensation disclosure, say-on-pay votes, MD&A and SOX 404(b).
- The definition of EGC focuses on the total annual gross revenues for the most recently completed fiscal year. As a result, even if a company had more than $1 billion in total annual gross revenues in the preceding two years, so long as its total annual gross revenues were less than $1 billion for its most recently completed fiscal year, a company contemplating an IPO would meet the total annual gross revenues test for EGC status.
- Although, generally, the definition of EGC does not include different standards for calculating revenues for different types of issuers, the staff thinks it would be appropriate for financial institutions to use the same approach in determining "total annual gross revenues" as the approach the staff developed for them for purposes of calculating revenues to determine smaller reporting company status under Exchange Act Rule 12b-2. See Section 5110.2(c) of the Division's Financial Reporting Manual.
- Where an issuer completes a transaction that results in its becoming a successor to a predecessor that was not eligible to be an EGC because its first sale of common equity securities occurred on or before December 8, 2011, then the successor is similarly ineligible to be an EGC.
- The staff will publicly release on EDGAR its comment letters and issuer response letters regarding confidential draft submissions no earlier than 20 business days following the effective date of a registration statement (the same time frame for the public release of staff comment letters and issuer responses with respect to filings that are not submitted confidentially). EGCs will be asked to resubmit, on EDGAR, their response letters to staff comment letters on confidential draft registration statements, using the submission type "CORRESP," when they first file their registration statements on EDGAR.
- An EGC should identify information for which it intends to seek confidential treatment when it submits its responses to staff comments on confidential draft registration statements. Although an EGC need not seek confidential treatment for its response letters during the course of the confidential review, in its response letters, the company should appropriately identify the information for which it intends to seek confidential treatment upon public filing to ensure that the staff does not include that information in its comment letters. When the company resubmits its responses to staff comments on the confidential draft registration statement on EDGAR, it should follow the Rule 83 procedures. Alternatively, the company could follow the Rule 83 procedures at the time it submits its response letters to the staff.
- For offerings that require disclosure of ratio of earnings to fixed charges, Item 503(d) of Reg S-K requires that disclosure for each of the last five fiscal years and the latest interim period for which financial statements are presented in the registration statement. Even though not expressly permitted under the JOBS Act, the staff will not object if an EGC presents in a registration statement its ratio of earnings to fixed charges for the same number of years for which it provides selected financial data disclosures in accordance with the JOBS Act.
- EGCs are required to comply with the XBRL requirements [No burden there, of course!].
- A company that has issued only registered debt securities on or before December 8, 2011 may still qualify as an EGC if its annual total gross revenues for its most recently completed fiscal year were less than $1 billion and none of the disqualifying conditions have been triggered. The effective date for the definition of EGC focuses only on whether the first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011.
- In its Form 10-K (or 20-F), as opposed to its IPO registration statement, an EGC that is not a smaller reporting company must include three years of audited financial statements, not two. However, in its Form 10-K, an EGC is not required to include audited financial statements for any period prior to the earliest audited period presented in connection with its IPO. For example, if an EGC's IPO registration statement is declared effective during the 3rd quarter of 2012, and the EGC has a December 31 fiscal year-end, the registration statement would include audited financial statements for 2011 and 2010. As a result, the EGC's first annual report, which will be for the fiscal year ending December 31, 2012 and will be filed in 2013, will include audited financial statements covering 2012, 2011 and 2010.
- An EGC 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 its IPO date has not yet occurred. An EGC must publicly file the Form S-4 or Form F-4 for its A/B debt exchange offer at least 21 days before its anticipated date of effectiveness.
- An issuer that lost its status as an EGC under the disqualification provisions in Sections 2(a)(19)(A), (B), (C) or (D) of the Securities Act (e.g., by becoming a large accelerated filer) may not regain that EGC status.
- Section 7(a)(2)(B) of the Securities Act provides that an EGC can take advantage of an extended transition period for complying with any "new or revised" financial accounting standard. The term "new or revised" financial accounting standard refers to any update issued by the FASB to its Accounting Standards Codification after April 5, 2012, the date of the enactment of the JOBS Act.
- An EGC foreign private issuer that reconciles its home country GAAP financial statements to U.S. GAAP can take advantage of the extended transition period provided in Section 7(a)(2)(B) for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation.
- Certain financial accounting standards (e.g., segment disclosures under ASC 280-10-15-3 and EPS computation, presentation and disclosures under ASC 260-10-5-1) exclude from their scope nonpublic entities, and the definition of nonpublic entities in U.S. GAAP typically includes companies that are not "issuers," as defined in Section 2(a) of SOX. EGCs that have chosen to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards are still required to comply with these standards. Section 7(a)(2)(B) provides only an accommodation with respect to the effective dates of new or revised financial accounting standards, and only applies if such standards apply to companies that are not "issuers" (i.e., private companies).
- Some non-U.S. jurisdictions have a separate set of financial accounting standards for nonpublic entities. If an EGC foreign private issuer has chosen to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation, the foreign private issuer may not apply the set of standards for nonpublic entities. Section 7(a)(2)(B) only provides an accommodation with respect to the effective dates of new or revised financial accounting standards, and only applies if those standards apply to companies that are not "issuers." It does not allow an EGC to apply financial accounting standards as if it were a nonpublic entity. Accordingly, EGCs may not report under a separate set of standards for nonpublic entities. Similarly, EGCs that are foreign private issuers may not report under IFRS for Small and Medium-sized Entities.
- If an EGC initially decides to take advantage of the extended transition period provided in Section 7(a)(2)(B), the staff will not object if the company later decides to opt in and comply with the financial accounting standard effective dates applicable to non-EGCs, so long as it complies with the requirements in Sections 107(b)(2) and (3) of the JOBS Act (i.e., complies with all the non-EGC standards for as long as it is an EGC). This decision should be prominently disclosed in the first periodic report or registration statement following the company's decision and is irrevocable.
- If an EGC submits a draft registration statement on a confidential basis, subsequently discovers a material error that requires a financial restatement and confidentially submits a draft amendment to the registration statement to correct the error and disclose the restatement, the EGC would be required to include the restatement disclosures until its financial statements are updated for the next annual period. ASC 250-10-50 requires that "when prior period adjustments are recorded, the resulting effects…on the net income of prior periods shall be disclosed in the annual report for the year in which the adjustments are made and in interim reports issued during that year subsequent to the date of recording the adjustments." ASC 250-10-50 further states that "[f]inancial statements of subsequent periods shall not repeat the [restatement] disclosures."
- Paragraphs 6 and 21 of IFRS 1, First-time Adoption of International Financial Reporting Standards, require a first-time adopter of IFRS to present an opening IFRS statement of financial position at the date of transition to IFRS. This requirement results in the presentation of three statements of financial position. Likewise, a foreign private issuer that is not a first-time adopter of IFRS is required by paragraph 10(f) of IAS 1, Presentation of Financial Statements, to provide three statements of financial position when it applies an accounting policy retrospectively, makes a retrospective restatement or reclassifies items in its financial statements. An EGC foreign private issuer that is either a first-time adopter of IFRS or required by paragraph 10(f) of IAS 1 to provide three statements of financial position may not include only two statements of financial position in its IPO registration statement. Notwithstanding Section 7(a)(2)(A) of the Securities Act, in order for this foreign private issuer to assert that its financial statements are prepared in compliance with IFRS as issued by the IASB, it must include three statements of financial position in the situations described above.
- Securities Act Section 2(a)(19)(B) provides that an EGC will lose its EGC status on the "last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement," provided that none of the other disqualifying conditions have previously been triggered. This date is determined by looking to the fiscal year during which the fifth anniversary occurs. The last day of this fiscal year will be the first day that the issuer is a non-EGC, provided that none of the other disqualifying conditions has been triggered. For example, if an issuer with a December 31 fiscal year-end first sold common equity securities pursuant to an effective registration statement on May 2, 2012, it would cease to be an EGC no later than December 31, 2017.
- An EGC that is not also a smaller reporting company may not elect to comply with the smaller reporting company version of Item 303 of Reg S-K. While an EGC is permitted to comply with the smaller reporting company version of Item 402 of Reg S-K, there is no similar option for Item 303. Instead, an EGC may, in its MD&A, discuss only those audited periods presented in its audited financial statements, which, in the IPO registration statement, can be limited to only two years. If the EGC provides only two years of audited financials, the EGC can limit its MD&A discussion to those two years.