SEC Staff Releases Additional JOBS Act Title I FAQs
The SEC's Division of Corporation Finance has released generally applicable frequently asked questions regarding Title I of the JOBS Act.
On April 16, 2012, the SEC's Division of Corporation Finance issued frequently asked questions (FAQs) addressing questions of general applicability under Title I of the JOBS Act. This section of the JOBS Act covers the IPO on-ramp, scaled disclosure and other provisions applicable to emerging growth companies (EGCs). Among other things, the FAQs clarify general principles regarding:
Determining EGC status.
Complying with EGC-scaled disclosures.
The process for submitting EGC registration statements for confidential review for US and foreign private issuers.
On April 16, 2012, the SEC's Division of Corporation Finance issued frequently asked questions (FAQs) addressing questions of general applicability under Title I of the JOBS Act (www.practicallaw.com/2-518-7869). This section of the JOBS Act covers the IPO on-ramp, scaled disclosure and other provisions applicable to emerging growth companies (www.practicallaw.com/3-518-8137) (EGCs). Among other things, the FAQs clarify that:
When determining EGC status, "total annual gross revenues" means total revenues as shown on the income statement presented under US GAAP (www.practicallaw.com/3-382-3512). For foreign private issuers, it means total revenues as shown on the income statement presented under IFRS (www.practicallaw.com/7-386-3676) as issued by the IASB (www.practicallaw.com/1-386-5635). Total revenues should be calculated in US dollars using the exchange rate as of the last day of the most recently completed fiscal year. If the financial statements for the most recent year included in the registration statement are those of the issuer's predecessor, the predecessor's revenues should be used to determine EGC status.
The definition of EGC excludes an issuer with the first registered sale of its common equity occurring on or before December 8, 2011. If an issuer had an effective registration statement before December 8, 2011 but the first sale occurred on or after that date, the issuer may still be considered an EGC. "First sale" includes:
the offering of common equity securities for cash;
the offering of common equity securities under an employee benefit plan on a Form S-8; and
a selling shareholder's secondary offering on a resale registration statement.
Unless changed by future rulemaking, the staff will apply the following general principles on when EGC status should be determined and on transitioning into and out of EGC status:
a company must qualify as an EGC at the time it submits a confidential draft registration statement and also at the time it submits each amendment;
if a company loses EGC status during the confidential review of its registration statement it would need to file a registration statement complying with non-EGC rules to continue the review process. At that time, prior confidential draft submissions would be filed as exhibits to the registration statement;
if a company files its registration statement when it qualifies as an EGC, the EGC rules continue to apply through effectiveness of the registration statement even if EGC status is lost;
for purposes of test the waters communications, EGC status should be determined at the time the company makes the communications; and
If a company made test the waters communications before filing a registration statement at a time when it qualifies as an EGC, but is no longer an EGC when it files a registration statement, the staff would not view the earlier communications as an illegal offer. Once EGC status is lost, further test the waters communications under Section 5(d) of the Securities Act are not permitted.
A company should disclose that it is an EGC on the cover page of its prospectus submitted to the staff confidentially and when filing on EDGAR.
A company with registration statements filed before the JOBS Act was enacted that is an EGC can switch to EGC-scaled disclosure with a pre-effective amendment to a pending registration statement or in a post-effective amendment.
A company that completed its IPO after December 8, 2011 but before the JOBS Act was enacted and is now an EGC can file its next periodic report under the Exchange Act using EGC-scaled disclosures.
Other than new or revised accounting standards, an EGC may decide to opt in and opt out of the EGC scaled disclosure provisions.
Foreign private issuers that qualify as EGCs can comply with EGC scaled disclosure to the extent relevant to the form requirements for foreign private issuers even though the JOBS Act refers only to Regulation S-K.
If a foreign private issuer chooses to take advantage of any benefit available to EGCs, then it will be treated as an EGC and will be required to publicly file its confidential registration statement submissions at least 21 days before the road show. If the foreign private issuer chooses not to take advantage of any EGC benefit, then it may follow the Division of Corporation Finance's policy on nonpublic submissions from foreign private issuers.
Canadian issuers filing under the Multi-Jurisdictional Disclosure System (MJDS) can qualify as EGCs. While the disclosure requirements would continue to be established under the issuer's home country standards according to the MJDS, other EGC provisions (for example, the test the waters communications and the deferral of compliance with Section 404(b) of the Sarbanes-Oxley Act) would be available to an MJDS filer that qualifies as an EGC.
An EGC presenting two years of audited financial statements in its IPO registration statement can limit the number of years of selected financial data included under Regulation S-K Item 301 to two years as well in that registration statement, despite the JOBS Act only referring to "any other registration statement" regarding the Item 301 scaled disclosure.
For registration statements after its IPO, an EGC does not need to present audited financial statements for any period before the earliest audited period presented in the registration statement for its IPO of common equity securities.
When first submitting a draft registration statement for confidential review, an EGC should notify the SEC reviewing staff whether it will be taking advantage of the extended transition period for complying with new or revised accounting standards. An EGC currently in registration or subject to Exchange Act reporting should make and disclose this choice in the next amendment to the registration statement or in the next periodic report, respectively. Any decision to opt out of this extended transition period new or revised accounting standards is irrevocable.
An EGC choosing to take advantage of the extended transition period for complying with new or revised accounting standards should refer to Staff Accounting Bulletin Topic 11M. For each recently issued accounting standard that will apply to its financial statements, an EGC choosing to take advantage of the extended transition period should disclose the date on which adoption is required for non-EGCs and the date on which the EGC will adopt the accounting standard, assuming it remains an EGC as of that date.
Until the SEC amends the form requirements, Regulation S-X and Regulation S-K to be consistent with the JOBS Act, EGCs may comply with Title I's disclosure provisions even if doing so would be inconsistent with existing rules and regulations.
If an EGC presents two years of audited financial statements in its registration statement but is also required by Regulation S-X to present three years of financial statements of other entities (for example, financial statements of certain acquired businesses) the EGC may present only two years of financial statements for these other entities.
When determining when a company loses EGC status, the staff issued the following guidance for the phrase, "date on which such issuer has during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt:"
the three-year period covers any rolling three-year period;
it is not limited to completed calendar or fiscal years; and
any non-convertible security that constitutes indebtedness is included, whether issued in a registered offering or not.
For more information on relief the JOBS Act provides for EGCs, see Practice Notes, JOBS Act: On-ramp to the Capital Markets for Emerging Growth Companies Summary (www.practicallaw.com/1-518-7351) and Road Map to the Jumpstart Our Business Startups (JOBS) Act of 2012 (www.practicallaw.com/6-518-6858).