SEC Offers Additional JOBS Act Guidance
The staff of the Securities and Exchange Commission’s Division of Corporation Finance (Staff) recently issued additional frequently asked questions (FAQs) providing guidance on questions raised under Title I (also known as the IPO on-ramp provisions) of the Jumpstart Our Business Startups Act (JOBS Act).1 The new FAQs supplement the Staff’s Title I guidance provided in FAQs issued on April 16, 2012.2
This alert summarizes key aspects of the Staff’s new FAQs as well as recent Staff comments on a registration statement for an emerging growth company (EGC) in which Andrews Kurth attorneys were involved and Staff public remarks.
Determining EGC Status
Total annual gross revenue test. The JOBS Act defines an EGC as any issuer with less than $1 billion of total annual gross revenues during the most recently completed fiscal year. In its new FAQs, the Staff clarified that an issuer with more than $1 billion of total annual gross revenues two years ago but less than $1 billion of revenues in the most recent fiscal year would satisfy the revenue test because the total annual gross revenues test applies to the most recently completed fiscal year.
In the case of financial institutions, the Staff believes that it would be appropriate to calculate total annual gross revenues using the same approach financial institutions use to calculate revenues when determining smaller reporting company (SRC) status as set forth in Section 5110.2(c) of the Division of Corporation Finance Financial Reporting Manual.
Eligible issuers. Business development companies3 may qualify as an EGC.
An issuer that has issued only debt securities pursuant to an effective registration statement under the Securities Act of 1933 (Securities Act) on or before December 8, 2011 may qualify as an EGC if it satisfies the definition and none of the disqualification provisions have been triggered. While not part of the Staff’s FAQs, such a debt issuer could conceivably remain an EGC indefinitely provided that it does not conduct a registered sale of common equity securities or trigger one of the disqualification provisions.
Ineligible issuers. Asset-backed securities issuers and investment companies registered under the 1940 Act cannot qualify as an EGC.
Upon completion of a transaction that results in an issuer becoming the successor to its predecessor’s registration and reporting obligations under the Securities Exchange Act of 1934, the successor cannot qualify as an EGC if the predecessor’s first sale of common equity securities pursuant to an effective Securities Act registration statement (IPO date) occurred on or before December 8, 2011.
Losing EGC Status
Clarification of disqualification provisions. Debt securities issued in an A/B debt exchange offer are not required to be counted towards the $1 billion debt limit for purposes of determining whether an issuer has lost its EGC status. Thus, only those debt securities issued in the private placement would count toward the $1 billion debt limit. However, the Staff noted during a recent webcast that debt securities issued as part of a refinancing of existing debt securities would count towards the $1 billion debt limit because the statutory language references issued debt, not issued and outstanding debt.
Unless another disqualification provision has been previously triggered, EGC status is lost as of the last day of the fiscal year during which the fifth anniversary of an EGC’s IPO date occurs. For example, an issuer with a December 31 fiscal year-end that had its IPO date on May 2, 2012 would cease to be an EGC no later than December 31, 2017.
In recent comments on an EGC's initial public offering (IPO) registration statement, the Staff has sought prospectus disclosure of how and when an issuer may lose EGC status.
Cannot regain EGC status. An issuer that conducted its first registered sale of common equity securities as an EGC cannot regain EGC status once it terminates due to the triggering of one of the disqualification provisions.
Confidential Submission Process
New confidential submission procedures. Prior to its IPO date, an EGC may submit to the Securities and Exchange Commission (SEC) a draft registration statement and related amendments for confidential, non-public review, so long as the initial submission and all amendments are publicly filed on the SEC’s EDGAR filing system at least 21 days before the road show. The SEC previously indicated that an eligible EGC should file a confidential draft registration statement in a text searchable PDF file on a CD/DVD or in paper. Beginning May 14, 2012, a secure e-mail system replaced the previously announced confidential submission procedures.4
Until the SEC is able to receive confidential draft registration statements on EDGAR, an EGC that submits a draft registration statement confidentially must follow these instructions on how to use the new secure e-mail system. All draft submissions must be in text searchable PDF format and should include a transmittal letter identifying the issuer and the type of submission and confirming the issuer’s EGC status.
Available for A/B debt exchange offers. An EGC may use the confidential submission process to submit a draft registration statement on Form S-4 or Form F-4 for an A/B debt exchange offer provided its IPO date has not yet occurred. The Form S-4 or Form F-4 must be publicly filed at least 21 days before its anticipated effectiveness date.
Public release of correspondence. The Staff will publicly release on EDGAR its comment letters on confidential submissions and issuer responses no earlier than 20 business days following the effective date of the registration statement. This is the same time frame for the release of correspondence related to non-confidential filings. EGCs will be asked to resubmit on EDGAR their response letters as correspondence (submission type ”CORRESP”) when they first publicly file their registration statement.
Protecting confidential information. To protect confidential information in its response letters to Staff comments on its confidential submissions, an EGC should either:
- follow the Rule 83 confidential treatment procedures when it submits its response letters; or
- identify in its response letters information for which it intends to seek confidential treatment upon public filing and follow the Rule 83 procedures when it resubmits its response letters with the first publicly filed registration statement.
Restatement disclosure. An EGC that restates financial statements during the confidential submission process must include restatement disclosures in its financial statements until they are updated for the next annual period. As a result, the restatement disclosures may not be limited to confidential submissions.
New or Revised Financial Accounting Standards
“Opting in” to compliance with new or revised accounting standards. An EGC that initially decides to take advantage of the extended transition period for complying with new or revised financial accounting standards may irrevocably decide to comply with the standard effective dates for non-EGCs prior to losing EGC status. To do so, the EGC must comply with all standards applicable to non-EGCs for the remainder of its time as an EGC and prominently disclose its decision in its first periodic report or registration statement following the decision.
Staff comments on decision to take advantage of extended transition period. In recent comments on an EGC's IPO registration statement, the Staff has sought the following prospectus disclosure related to an EGC’s decision to take advantage of the extended transition period:
- if the EGC elects not to use the extended transition period, a statement that the election is irrevocable; or
- if the EGC elects to use the extended transition period,
- a risk factor explaining that the election allows the EGC to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies; and
- a statement in the risk factor and in the MD&A critical accounting policy disclosures that, as a result of the election, the EGC’s financial statements may not be comparable to companies that comply with public company effective dates.
Meaning of “new or revised” financial accounting standard. “New or revised” financial accounting standard means any post-April 5, 2012 update issued by the Financial Accounting Standards Board to its Accounting Standards Codification (ASC).
Scope of extended transition period. The extended transition period is only available with respect to the effective dates of new or revised accounting standards. An EGC must comply with existing financial accounting standards that exclude non-public entities from their scope (e.g., segment disclosures under ASC 280-10-15-3 and earnings per share computation, presentation and disclosures under ASC 260-10-5-1).
Foreign private issuer U.S. GAAP reconciliations. A foreign private issuer that qualifies as an EGC and that provides a U.S. GAAP reconciliation may take advantage of the extended transition period when preparing its reconciliation. However, as noted in the prior paragraph, the extended transition period is only available with respect to the effective dates of new or revised accounting standards and does not allow an EGC to apply accounting standards as if it were a non-public entity. Accordingly, in preparing its reconciliation, such a foreign private issuer may not report under a separate set of non-U.S. accounting standards for non-public entities or report under IFRS for Small and Medium-sized Entities.
Other Disclosure Matters
EGC regulatory exemptions. In recent comments on an EGC's IPO registration statement, the Staff has sought prospectus disclosure of the various regulatory exemptions available to EGCs, including the exemptions from the auditor attestation requirement and the say-on-pay vote requirement. Even if an issuer does not intend to take advantage of the temporary regulatory exemptions, the Staff has sought prospectus cover disclosure of an issuer's EGC status and other prospectus disclosures previously discussed in this alert.
Research reports and test the waters communications. During a recent webcast, a member of the Staff noted that he expects the Staff to ask EGCs to provide to the Staff as supplemental information all pre-deal research reports and test the waters communications. As a result of this expectation and related liability associated with the use of these materials, offering participants should carefully vet the content of these materials prior to using just as they would a prospectus or free writing prospectus.
Audited financial statements in annual reports. In its first annual report on Form 10-K or Form 20-F, an EGC will not be required to include audited financial statements for any period prior to the earliest period presented in connection with its IPO registration statement. Thereafter, unless it also qualifies as an SRC, an EGC must present three years of audited financial statements in its annual report.
Scaled MD&A disclosures. An EGC that does not also qualify as an SRC cannot provide scaled MD&A disclosure to the same extent as an SRC.
XBRL compliance. EGCs must comply with XBRL requirements.
Scaled ratio of earnings to fixed charges disclosure. If ratio of earnings to fixed charges disclosure is required in a registration statement (as required in certain offerings by Regulation S-K Item 503(d)), an EGC does not need to present the ratio for any year prior to the earliest year for which it provides selected financial data disclosure.
1. See SEC Div. of Corp. Fin., Jumpstart Our Business Startups Act Frequently Asked Questions - Generally Applicable Questions on Title I of the JOBS Act, Questions 18 - 41 (May 3, 2012), available at http://sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
In addition, on May 7, 2012, the Securities and Exchange Commission’s Division of Trading and Markets issued FAQs about crowdfunding intermediaries. See SEC Div. of Trading & Mkts., Frequently Asked Questions About Crowdfunding Intermediaries (May 7, 2012), available at http://sec.gov/divisions/marketreg/imjobsact-crowdfundingintermediariesfaq.htm. The FAQs discuss the registration requirements imposed upon intermediaries and the limitations on, and legal obligations of, crowdfunding intermediaries under the JOBS Act.
2. Please see our client alert dated April 18, 2012, SEC’s Division of Corporation Finance Issues JOBS Act Guidance, discussing, among other things, Questions 1-17.
3. Business development companies are a category of closed-end investment companies that are not required to register under the Investment Company Act of 1940 (1940 Act) but are regulated pursuant to Sections 55 through 65 of the 1940 Act.
4. See SEC Div. of Corp. Fin., Division update regarding submission of draft registration statements for confidential review under the JOBS Act and non-public review under the Division’s policy for certain foreign private issuers (May 11, 2012), available at http://sec.gov/divisions/corpfin/cfannouncements/secureemail.htm.