Emerging Growth Companies 101 l Securities Law Blog
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”), which was intended to help smaller and emerging growth companies raise capital in the U.S. markets.
The JOBS Act amends, and adds new sections to, the Securities Act of 1933 (the “1933 Act”) and the Securities Exchange Act of 1934 (the “1934 Act”), as well as the Sarbanes-Oxley Act of 2002.
The JOBS Act implements measures relating to initial and direct public offerings and creates a new category of issuer known as the Emerging Growth Company.
The JOBS Act defines an Emerging Growth Company as an issuer with annual gross revenues of less than $1 billion during its most recent fiscal year.
Once a company becomes an Emerging Growth Company, it will retain such status until the earliest of:
♦ The first fiscal year after its annual revenues are more than $1 billion.
♦ The first fiscal year following the fifth anniversary of its IPO.
♦ The date on which the issuer issued more than $1 billion in nonconvertible debt in a previous three-year period.
♦ The date on which the issuer qualifies as a large accelerated filer under SEC rules.
Impact on Initial and Direct Public Offerings
The JOBS Act exempts Emerging Growth Companies from certain securities regulations applicable to the registration statement process. This provides significant benefits for companies that conduct IPOs, as well as for those that go public direct by conducting a direct public offering.
Testing the Waters
Provided the Emerging Growth Company communicates only with qualified institutional buyers or accredited investors, it may “test the waters” for interest in its planned public offering.
Under the JOBS Act brokers and dealers are permitted to publish or otherwise distribute research reports on an Emerging Growth Company at any time before, during, or after a public offering without creating a “gun jumping” or other violation of Section 5 of the Securities Act.
The JOBS Act allows securities analysts to participate in communications with an Emerging Growth Company and other personnel of abroker-dealer, or investment bank.
The JOBS Act allows an Emerging Growth Company to submit a registration statement, as well as any amendments to the SEC confidentially instead of filing its initial registration statement and amendments publicly through the SEC’s EDGAR database. Once the SEC’s review process is complete of the confidentially submitted registration statement, the confidentially submitted registration statement will be published on EDGAR.
Lessened Disclosure Requirements
Emerging Growth Companies are required to include two years of audited financial statements in their registration statement, along with two years of management’s discussion and analysis.
The JOBS Act provides Emerging Growth Companies with less stringent disclosure obligations, including:
♦ Executive compensation disclosure under Item 402 of Regulation S-K applicable to smaller public companies.
♦ Exemption from the “say on pay” provisions of the Dodd-Frank Act.
♦ Relief from the auditor attestation of internal controls required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
♦ Exemption from compliance with PCAOB rules regarding mandatory audit firm rotation and expanded auditor reports.
The creation of the Emerging Growth Company will reduce the uncertainty, costs and regulatory burdens of public company status. Most companies that elect to go public will qualify as Emerging Growth Companies because they will have revenues of less than $1 billion during their most recent fiscal year. As a result of the creation of the Emerging Growth Company, direct public offerings are an appealing, cost effective method for private companies to go public and maintain public company status.
Anyone seeking to go public should seek the services of an experienced securities attorney. Hamilton & Associates has assisted more than 200 market participants in securities law matters.