It is now over three months since the President signed the Jumpstart Our Business Startups (“JOBS”) Act (the “Act”) into law.The intent of the Act was intended to give private companies some of the benefits of a public company without the reporting requirements and oversight of a public company, thus creating economic growth and jobs.The legislation met much scrutiny as it is a reversal to the trend set forth by the Sarbanes-Oxley legislation that investor activists had demanded ten years ago.
Highlights of the Act for private companies included:
- Increasing the number of shareholders a company may have before being required to register its stock with the SEC
- Extending the time to comply with the Sarbanes-Oxley auditing requirements
- Relaxing SEC registration requirements from the securities offerings exemption amount from the twenty year-old rule of $5 million to the revised level of $50 million
- Allowing companies to raise up to $1 million annually from small-dollar investments from qualified investors via web-based platforms monitored by the SEC
A new category of issuer was also created with the passing of the Act. Emerging Growth Companies (“EGC”), as defined by the SEC, are exempt from certain reporting disclosures that would normally be required for public companies. Among other things, they are only required to present two years of audited financial statements for registration for an Initial Public Offering (“IPO”) of common equity shares, they may not be required to make some financial statement disclosures that public companies do, but private companies do not, and they are not required to report on internal control over financial reporting. The designation as an EGC lasts until the year end of the fifth anniversary of the year EGC status had begun. EGCs will be able to make confidential submissions for non-public registrations on a searchable PDF or by paper.
EGC’s are defined, in part, by the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion under U.S. GAAP or IFRS if that is the reporting basis of a foreign private issuer, during its most recently completed fiscal year, subsequent to December 8, 2011.A company is not considered to be an EGC if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.
But as is many times the case, there are exceptions and gray areas; a list of questions was answered in the SEC’s “Generally Applicable Questions” discussion (http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm).The main points focus on what qualifies for EGC status and what can disqualify it.
- All non-convertible debt securities issued over the prior three-year rolling period, whether outstanding or not, are required to be counted against the $1 billion debt limit, but A/B exchanges of do not count towards the $1 billion limit. If they did, this would result in a doubling-up effect which would disqualify some companies.
- Asset-backed securities and investment companies registered under the Investment Company Act do not qualify as EGCs due to the sensitive nature of the business, regulatory and separate disclosure requirements, however, business development companies may qualify if they are required to register under the Investment Company Act of 1940 but are regulated under that Act.
- In an instance when an issuer completes a transaction whereby the issuer becomes the successor, the issuer is not eligible to be an EGC had it not qualified as an EGC in the first place.
- If any of the revenue, debt issuance or other requirements to qualify as an EGC are no longer met during the maximum five-year life as an EGC, the company loses its EGC status.
- A foreign issuer may be eligible for the confidential submission process and would follow the same rules as domestic companies.
Only time will tell if the benefits of this Act that permit a company to grow with less government oversight will outweigh the corporate fraud opportunity that could occur from relaxed regulation.
