July 5, 2022

Volume XII, Number 186


SEC Staff Issues JOBS Act Guidance

The Staff of the Securities and Exchange Commission’s Division of Corporation Finance has issued responses to Frequently Asked Questions about the Jumpstart Our Business Startups Act (JOBS Act). We highlight below certain of the FAQs on Title I of the JOBS Act that we believe may be of particular interest to those contemplating the IPO process. These FAQs may be accessed at http://www.sec.gov/divisions/corpfin/guidance/ cfjjobsactfaq-title-i-general.htm.

EGC Status

As we noted in an earlier alert, which can be accessed by clicking here, Title I of the JOBS Act makes accommodations for Emerging Growth Companies (EGCs) in the form of scaled disclosure and eased regulatory requirements, both before and after they raise capital and/or go public. After going public, EGCs only become subject to all of

the requirements applicable to non-EGCs once they are no longer EGCs. Under the JOBS Act, an EGC is an issuer that had total annual gross revenues of less than $1 billion in its last fiscal year and did not sell common equity securities in a registered offering prior to December 8, 2011. An EGC will maintain that status until the earliest of:

> the last day of the fiscal year following the fifth anniversary of its IPO;

> the day when it has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or

> the day when it is deemed a "large accelerated filer" under the Exchange Act (which would occur when the issuer has  a public float of $700 million or more as of the last business day of its most recently completed second fiscal quarter, provided it has been subject to the requirements of the Exchange Act for at least twelve months and filed at least one annual report).

The FAQs provide clarifying guidance on determining EGC status:

> "Total annual gross revenues" means an issuer’s total annual revenue as presented under U.S. generally accepted accounting principles for the most recently completed fiscal year. If the financial statements for the most recent year included in the registration statement are those of a predecessor, the predecessor’s revenues should be used to determine whether the issuer meets the EGC definition. (FAQ # 1)

> If a company had more than $1 billion in total annual gross revenues in one or more fiscal years in its history, but less than $1 billion in its most recently completed fiscal year, it may still qualify as an EGC because the test does not take into consideration any period other than the most recently completed fiscal year. (FAQ # 22)

> If a company’s common equity securities were first sold in a registered offering prior to December 8, 2011, the company cannot qualify as an EGC. The SEC Staff has clarified that the first registered sale of common equity securities is not limited to a traditional IPO, but could also include, for example, an offering of common equity securities pursuant to an employee benefit plan on a Form

S-8, as well as a selling stockholder’s secondary offering on a resale registration statement. (FAQ # 2) A company that issued registered debt securities (as opposed to common equity securities) prior to December 8, 2011, may still qualify as an EGC. (FAQ # 29)

> A company cannot regain EGC status after losing it. (FAQ # 32)

> When determining whether a company will lose EGC status as a result of having issued $1 billion of non-convertible debt over the past three years, all non- convertible debt issued in the past three years will be counted whether or not it is still outstanding. The SEC has clarified that the three-year period is a rolling three-year period, not just completed calendar or fiscal years. The SEC Staff has advised that an issuer need not double-count debt securities issued in an A/B debt exchange offer to register debt previously issued on a private basis, as its views the exchange offer as the completion of the same capital-raising transaction. (FAQ # 17 and # 18)

Scaled Disclosure Requirements for EGCs

The JOBS Act makes certain accommodations to EGCs with respect to disclosure requirements, which the SEC refers to as "scaled disclosure." The FAQs clarify certain aspects of the applicability of the scaled disclosure accommodations:

> An EGC is permitted to selectively adopt the scaled disclosure provisions, except that an EGC must choose at the outset whether or not it will make use of the extended transition period for new or revised accounting standards. (FAQ # 7) An EGC that chooses to take advantage of the extended transition period may later decide to opt in and comply in accordance with the effective dates applicable to non-EGCs, but its decision must be prominently disclosed in its first periodic report or registration statement following that decision and is irrevocable. (FAQ #37)

> Though the scaled disclosure requirements permit an EGC to present only two years of audited financial statements in its IPO registration statement, it will be required to present three years of audited financial statements in its annual report on Form 10-K or 20-F (unless it is a smaller reporting company). (FAQ #30)

> EGCs must comply with XBRL requirements as would be applicable for non-EGCs. (FAQ # 28)

> Except for preparing only two years of MD&A for registration statements in which it presents two years of audited financial statements, EGCs that are not smaller reporting companies may not avail themselves of the MD&A disclosure accommodations available to smaller reporting companies. (FAQ # 41)

Confidential Submissions

The JOBS Act permits an EGC to submit its IPO registration statement confidentially, although the initial submission and subsequent amendments must be filed publicly at least 21 days before the EGC conducts its roadshow. The FAQs provide more detail and direction regarding the confidential submission process:

> The SEC Staff has confirmed that it will publicly release comment letters and issuer responses exchanged between the Staff and EGCs during the confidential submission process no earlier than 20 business days after the effectiveness of the related registration statement. EGCs will be required to file their responses as EDGAR correspondence when they first file their registration statement via EDGAR. (FAQ # 25)

> EGCs that plan to seek permanent confidential treatment for information contained in their response letters are advised either to follow the standard Rule 83 procedures when making their confidential submissions or to identify to the Staff the information for which confidential treatment will be sought upon filing. This will allow the Staff to avoid including confidential information in its comment letters to the issuer. (FAQ # 26)

> The SEC Staff has issued additional FAQs about the confidential submission process, including clarification about what must be included in a "draft registration statement" submitted confidentially (FAQ # 7); how to calculate the 21-day period prior to the roadshow, noting that it does not consider "testing the waters" communications to constitute a roadshow (FAQ # 8); and that, if there is no traditional roadshow, the registration statement should be filed publicly no later than 21 days before the effective date of the registration statement (FAQ # 9). This guidance may be accessed athttp://www.sec.gov/divisions/corpfin/HYPERLINK http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm guidance/cfjumpstartfaq.htm.

EGC Comment Letters

In connection with its review of EGC registration statements, the Staff has been issuing comments to EGCs requesting that certain disclosure regarding EGC status be included in their revised filings. Included among those comments are requests to:

> indicate EGC status on the prospectus cover page;

> describe the various exemptions available to the issuer as an EGC;

> disclose its election whether or not to make use of the extended transition period for new or revised accounting standards;

> if the EGC elects to opt out of the extended transition period, include a statement that the election is irrevocable; and

> if the EGC elects to make use of the extended transition period, provide a risk factor, as well as a statement in the critical accounting policy disclosures in its MD&A, that its financial statements may not be comparable to those of companies that comply with public company effective dates.

Through participation as panelists at conferences and other similar events, members of the SEC Staff have also indicated that, although EGCs will not be required to file "test-the- waters" communications publicly, the Staff will request EGCs to provide copies of such communications to the Staff on a supplemental basis.

The Staff of the SEC’s Division of Corporate Finance has also issued FAQs regarding changes to registration and deregistration requirements under the Exchange Act resulting from the JOBS Act. These changes primarily relax the registration requirements by increasing the number of record holders of a class of equity securities giving rise to the requirement to register that class of securities. These FAQs may be accessed at http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm. Although the SEC expects additional rulemaking in this area, the JOBS Act changes are currently effective.

The JOBS Act also provides for certain crowdfunding and Regulation A exemptions, which have garnered significant interest from capital markets participants. It should be noted that rulemaking is needed to effectuate these exemptions and, therefore, they are not yet in effect. The Staff of the SEC’s Division of Trading and Markets, however, has issued FAQs on crowdfunding intermediaries,whichmay be accessed at http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm. 

© 2022 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume II, Number 182

About this Author

Elizabeth A. Diffley, Corporate, Securities Attorney, Drinker Biddle, Law Firm

Elizabeth A. Diffley is an accomplished and pragmatic advisor to public and private clients on corporate and securities matters, including corporate governance, capital raising transactions, public company reporting and compliance, and mergers and acquisitions, as well as general corporate matters. Knowledgeable across a broad range of industries, Beth has particular experience advising insurance and other financial services companies on a variety of securities, mergers and acquisitions, governance and general corporate matters.