Part 7 of a series of posts on the JOBS Act
Emerging Growth Companies, or EGCs, are one of the primary components of the JOBS Act of 2012.
EGCs, in general, are young companies most likely to benefit from the Act.
The U.S. Securities and Exchange Commission’s Division of Corporate Finance released an FAQ publication on EGCs that answers many of the most SEC frequently asked questions about them.
Here are some of the 54 questions addressed by SEC:
Question: How can an issuer determine whether or not it meets the revenue test for Emerging Growth Company?
Answer: An Emerging Growth Company is defined in the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year. The phrase “total annual gross revenues” means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).
If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues for purposes of this test should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year.
In addition, if the financial statements for the most rent year included in the registration statement are those for the predecessor of the issuer, the predecessor’s revenues should be used when determining if the issuer meets the definition of an emerging growth company.
Question: How can an issuer determine whether it qualifies as an “emerging growth company” as f the effective date for the definition of that term?
Answer: Section 101(d0 of the JOBS Act provides an “effective date” for the definition of emerging growth company: an “issuer shall not be an emerging growth company for purposes of [the Securities Act and the Exchange Act]…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 Dec. 8, 2011.”
The phrase “first sale of common equity securities” in the JOBS Act is not limited to a company’s initial primary offering of common equity securities for cash. It could also include offering common equity pursuant to an employee benefit plan on a Form S-8 as well as a selling shareholder’s secondary offering on a resale registration statement.
Even if the issuer had a registration statement declared effective on or before Dec. 8, 2011, so long as the first sale of common equity securities occurs after Dec. 8, 2011, an issuer may qualify as an emerging growth company, assuming the other requirements of the definition are satisfied.
Question: When would a company determine whether it is an emerging growth company for purposes of the various provisions in Title 1?
Answer: Current Commission rules do not address when emerging growth company status should be determined or provide for any transition into or out of emerging growth company status. Absent rule changes, we will apply the following general principles, based on current rules and on the language of Title 1.
A company must qualify as an emerging growth company at the time of submission in order to submit a confidential draft registration statement, or any amendment thereto, under Securities Act Section 6e. If a company ceases to qualify as an emerging growth company while undergoing the confidential review of its draft submission statement…it would need to file a registration statement to continue the review process and comply with current rules and regulations applicable to companies that are not emerging growth companies. At that time, the prior confidential draft submissions would be filed as exhibits to the registration statement.
(See the SEC publication for more)
Question: How should an emerging growth company identify itself as an emerging growth company in a draft registration statement submitted to the staff on a confidential basis under Securities Act Section 6e and in the subsequent electronic filing of the registration statement on EDGAR?
Answer: The issuer should disclose that it is an emerging growth company on the cover page of its prospectus.
Question: May an issuer that qualifies as an emerging growth company amend its registration statement to provide the scaled disclosure available to emerging growth companies if the registration statement was initially filed prior to April 5, 2012?
Answer: Yes. The emerging growth company may provide the scaled disclosure available to emerging growth companies in a pre-effective amendment to a pending registration statement or in a post-effective amendment.