Part 2 of a series of posts on the JOBS Act
A key provision of the JOBS Act that went into effect immediately upon its adoption in April 2012 was the creation of “emerging Growth Companies,” or EGCs, which now enjoy special status when filing IPOs.
An EGC is defined as a new class of securities issuer that had gross revenues of less than $1 billion during its most recently completed fiscal year.
EGCs were approved under Title 1 of the JOBS Act and created to help relieve the financial and confidentiality burdens of going public through an Initial Public Offering (IPO).
Under the Act, certain regulatory requirements can be phased in for EGCs during a five-year period called an IPO “on-ramp.”
And in a major change from past practice, an EGC can also submit its IPO registration statement and later amendments to the SEC on a confidential basis.
The provisions of the JOBS Act related to EGCs were effective immediately upon adoption of the Act and did not require further rulemaking by the Securities and Exchange Commission, although the SEC has issued additional guidance for companies since then.
A status report on the JOBS Act issued by Ernst & Young in August 2014 said smaller companies qualifying as EGCs were continuing to dominate the IPO market. About 81 percent of all publicly filed IPO statements and about 84 percent of the IPOs that have become effective since April 2012 have been filed by EGCs.
EGCs that publicly filed IPO registration statements have been primarily in the health care, technology, real estate, oil-and-gas and financial services industries, the E&Y report said.
Here’s the breakdown:
- Real estate—9%
- Financial services–9%
EGC non-eligibility conditions include:
- Companies that have issued more than $1 billion in nonconvertible debt securities over a rolling 36-month period would NOT qualify as an EGC.
- Companies that had their first sale of common equity securities under an effective registration statement on or before Dec. 8, 2011 would NOT qualify as an EGC.
And an issuer that DOES have EGC status under the JOBS Act would lose its eligibility as an EGC five years after its common equity IPO or earlier if it meets any of the following criteria:
- Its annual revenues exceed $1 billion.
- It issues more than $1 billion in nonconvertible debt securities over a rolling 36-month period, including securities issued in registered or unregistered offerings.
- It becomes a large accelerated filer (i.e., a seasoned issuer with public float of $700 million or more).
Issuers may generally retain their EGC status for up to five years after their IPO, but they should carefully monitor their eligibility.
Changes in a business’ revenue during that time could lead to an earlier-than-anticipated financial reporting obligation.
The E&Y report said approximately 85 percent of the EGCs that filed IPO registration statements since enactment of the JOBS Act have taken advantage of the provision’s confidential review aspect.
The provision allows EGCs to confidentially submit their IPO registration statements to the SEC, including confidential comments from the SEC, before the company files publicly.
EGCs are required to file all prior confidential submissions no later than 21 days before their road shows, or no later than 21 days before the anticipated effective date of the registration statement if the company is not conducting a road show.
One result of the JOBS Act provision allowing confidential SEC submissions has been reduced visibility into the IPO pipeline, the E&Y report said.
E&Y said one way to provide IPO market participants with meaningful data while protecting company confidentiality would be for the SEC to publish confidential IPO submission data on an aggregate and anonymous basis.
Such nonspecific pipeline data would be very helpful for market participants and IPO candidates to assess the direction of the IPO market, the report said.