More Staff FAQs on the JOBS Act -- Scaled Disclosure and Other Issues Related to EGCs

By Cydney Posner

This morning, the SEC posted new guidance regarding Title I of the JOBS Act, which covers scaled disclosure and other provisions applicable to emerging growth companies (EGCs). 

• Whether a company meets the <$1B total annual gross revenue test for EGC status is determined by reference to the company's total revenues as shown on its income statement presented under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer (FPI)). If the financial statements of a FPI issuer are presented in a currency other than U.S. dollars, revenues for purposes of this test should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year. In addition, if the financial statements for the most recent year included in the registration statement are those of the predecessor of the issuer, the predecessor's revenues should be used when determining if the issuer meets the definition of an EGC.
• Under the JOBS Act, a company will not be an EGC if the first registered sale of its common equity securities occurred on or before December 8, 2011. The "first sale" is not limited to a sale in an IPO, but could also include common equity sold under an employee benefit plan on a Form S-8 as well as a selling shareholder's secondary offering on a resale registration statement. Even if the company had a registration statement declared effective on or before December 8, 2011, so long as the first sale of common equity occurred after December 8, 2011, the company may qualify as an EGC, assuming the other requirements of the definition are satisfied.
• Although there are no rules currently in effect for transitioning in and out of EGC status, the staff will apply the following general principles:
  • To submit a confidential draft registration statement (or an amendment), the company must qualify as an EGC at the time of submission and throughout the confidential review process. If the company ceases to qualify as an EGC during the confidential review, it must file a registration statement to continue the review using the normal procedures, including filing the prior confidential draft submissions as exhibits to the filed registration statement.
  • Under Rule 401(a), a company's status at the time of the initial filing date of its registration statement will determine the requirements for the form and contents of that registration statement. Since a confidential submission is not a "filing," if a company submitted a draft registration statement for confidential review when it was an EGC, but was no longer an EGC when it publicly filed its initial registration statement, then the form and contents of the initial registration statement would need to comply with the non-EGC requirements. If, however, it filed its initial registration statement when it still qualified as an EGC, the disclosure provisions for EGCs would continue to apply through effectiveness of the registration statement even if the company lost its EGC status during registration.
  • Availability of Section 5(d) for test-the-waters communications by an EGC would be measured at the time the company engaged in the communication. If the company made test-the-waters communications before filing a registration statement at a time when it qualified as an EGC, but was no longer an EGC at the time of filing, the staff would not view the earlier communications as a violation of Section 5. Further test-the-waters communications in reliance on Section 5(d), however, would not be permitted if the company no longer qualified as an EGC. The same approach would apply to the research reports described in amended Securities Act Section 2(a)(3).
• To identify itself as an EGC, the company should disclose that it is an EGC on the cover page of its prospectus both in the draft registration statement submitted confidentially and in the subsequent EDGAR filing.
• If the registration statement was initially filed prior to April 5, 2012, an EGC may provide the scaled disclosure available to EGCs in a pre-effective amendment to a pending registration statement or in a post-effective amendment.
• An EGC that completed its IPO after December 8, 2011 and prior to April 5, 2012, may file its next periodic report using the scaled disclosure provisions.
• An EGC does not need follow all of the scaled disclosure provisions; other than the accounting standards specifically referenced in Section 7(a)(2)(B) of the Securities Act and Section 107(b) of the JOBS Act, an EGC may decide to follow some of the scaled disclosure provisions and some of the regular disclosure requirements. [But does selection have to be on an item-by-item basis, as was the case at one point for small business issuers? For example, can an EGC provide some of S-K 402 that is not required, but not all of it? Is it permissible to comply with some of the subsections of an item but not others?]
• An FPI that qualifies as an EGC may comply with the scaled disclosure provisions available to EGCs to the extent relevant to the form requirements for FPIs, even though the JOBS Act refers only to Reg S-K and does not refer to the corresponding items in Form 20-F.
• If an FPI qualifies as an EGC but is also entitled to submit its draft registration statement confidentially under Corp Fin's policy for FPIs, the FPI will be required to publicly file its confidential submissions at least 21 days before the road show if the FPI chooses to take advantage of any benefit available to EGCs. If the FPI does not take advantage of any EGC benefit, then it may follow the Corp Fin policy and would not need to file publicly 21 days prior to the road show.
• A Canadian issuer filing under the Multi-Jurisdictional Disclosure System (MJDS) may qualify as an EGC. While the disclosure requirements for the Canadian issuer would continue to be established under its home country standards in accordance with the MJDS, other provisions of Title I of the JOBS Act, such as the test-the-waters provision in Section 5(d) of the Securities Act and the deferral of compliance with SOX 404(b), would be available to an MJDS filer that qualifies as an EGC.
• If an EGC presents only two years of audited financial statements in an IPO registration statement (as permitted by the JOBS Act), it may limit the number of years of selected financial data under Item 301 of Reg S-K to two years as well, even though the language of the JOBS Act is not entirely clear about that point (suggesting that limited selected financials are permitted only in "any other" registration statement).
• The provision in the JOBS Act permitting the inclusion of only two years of audited financial statements is limited to an EGC's IPO registration statement. However, the staff will not object if, in other registration statements, an EGC does not present audited financial statements for any period prior to the earliest audited period presented in connection with its IPO.
• An EGC may choose, irrevocably, not to take advantage of the extended transition period provided in JOBS Act for complying with new or revised accounting standards and must advise the SEC of that choice at the time the company is first required to file a registration statement, periodic or other report. The staff advises that EGCs should notify the review staff of that choice in their initial confidential submissions (again, not technically required because the submission is not "filed"), as that choice will inform the staff's review. EGCs that currently are in registration or are subject to Exchange Act reporting should make and disclose their choices in the next amendment to their registration statements or in their next periodic reports, respectively.
• If an EGC chooses to take advantage of the extended transition period provided for complying with new or revised accounting standards, the EGC should disclose, for each recently issued accounting standard that will apply to its financial statements, the date on which adoption is required for non-EGCs and the date on which the EGC will adopt the recently issued accounting standard, assuming it remains an EGC as of that date.
• Until necessary amendments are adopted and effective, there will be conflicts between the JOBS Act provisions and the rules and forms. An EGC may comply with the JOBS Act disclosure provisions in its registration statements, periodic reports and proxy statements, even if doing so would be inconsistent with existing rules and regulations. For example, neither Sections 102(c) (allowing EGCs to comply with S-K 402 to the same extent as a smaller reporting company) or 103 (allowing EGCs to avoid SOX 404(b)) of the JOBS Act were enacted as part of the Exchange Act, but the staff views them as superseding current rules. For purposes of SOX 906 certifications, the staff views "compliance with Sections 102(c) and 103 of the JOBS Act as being consistent with full compliance with the requirements of Sections 13(a) or 15(d) of the Exchange Act."
• Companies may be required to present up to three years of financial statements of other entities (e.g., acquired businesses and equity method investees) in their registration statements, based on the significance of those entities. Adopting an approach similar to that applicable to acquisitions by smaller reporting companies, the staff will not object If an EGC presents only two years of financial statements for these other entities in its registration statement, even though the significance test would otherwise require three years.
• The JOBS Act provides that an issuer may lose its EGC status on the "date on which such issuer has during the previous three-year period, issued more than $1 billion in non-convertible debt" (provided that none of the other disqualifying conditions has previously been triggered). The three-year period covers any rolling three-year period. It is not limited to completed calendar or fiscal years. As of any date on which an issuer has issued more than $1 billion in non-convertible debt over the three preceding years, the issuer will lose its status as an EGC, provided that none of the other disqualifying conditions has already been triggered. "Non-convertible debt" means any non-convertible security that constitutes indebtedness, whether or not issued in a registered offering.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction, and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may have been generated with the assistance of artificial intelligence (AI) in accordance with our AI Principles, may be considered Attorney Advertising and is subject to our legal notices.