On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act of 2012, the JOBS Act. The Act implements measures relating to the IPO process and reporting requirements for a new category of issuer known as the “emerging growth company,” or EGC. The Act defines an EGC as a company with annual gross revenues of less than $1 billion during its most recent fiscal year. A company will retain its EGC status until the earliest of:
· The first fiscal year after its annual revenues exceed $1 billion.
· The first fiscal year following the fifth anniversary of its IPO.
· The date on which the company had, during the previous three-year period, issued more than $1 billion in non-convertible debt.
· The date on which the company qualifies as a large accelerated filer.
The Act amends applicable federal securities laws to exempt EGCs from:
· The requirement to publicly file an IPO registration statement. An EGC may confidentially submit its registration statement and any amendments to the SEC.
· The requirement to include three years of audited financial statements in an IPO registration statement. EGCs only need to include two years of audited financial statements. Likewise, the MD&A need only include two years of discussion and analysis.
· Restrictions on communications ahead of public offerings, provided the EGC communicates only with qualified institutional buyers or accredited investors. This allows EGCs to “test the waters” before a contemplated offering.
The Act also eases the rules on research relating to EGCs. Under the Act brokers and dealers are permitted to publish or otherwise distribute research reports on an EGC at any time before, during, or after an offering without creating a gun-jumping or other violation of Section 5 of the Securities Act. Furthermore, the Act allows for securities analysts to participate in communications with an EGC and other personnel of the broker, dealer, or investment bank.
The Act amends applicable federal securities laws provide relief to EGCs with respect to disclosure requirements, including:
· Permitted compliance with the less burdensome 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.
· Not having to comply with PCAOB rules regarding mandatory audit firm rotation or an expanded auditor report.
These changes should ease the regulatory burdens and costs of becoming a public company.