Today’s post is the penultimate of this series covering the recently signed JOBS Act, and covers the Act’s Title I – Reopening American Capital Markets to Emerging Growth Companies. Check back later this week for more on Crowdfunding and a recap on who the JOBS Act really helps and who needs to be watch out. Or, instead of periodically checking back, you can simply subscribe to the Securities Compliance Sentinel for updates sent straight to your inbox’s spam folder.
Title I of the Act, Reopening American Capital Markets to Emerging Growth Companies (or RACMEGC, so named because the Congressional acronym gurus probably exhausted themselves coming up with the JOBS Act), purports to address the IPO decline by creating a category of “Emerging Growth Companies” and relieving those companies of some reporting requirements. Unlike most of the JOBS Act, this part became effective immediately upon the President’s signature last week – no need to wait for the SEC.
So, what’s an “Emerging Growth Company” (EGC)? Essentially, an EGC is an issuer with gross revenues under $1 Billion last year (and that hasn’t issued more than $1 Billion in debt during the last 3 years). An issuer can remain an EGC for up to 5 years following its IPO. If an issuer is deemed a large accelerated filer, then they lose EGC status.
EGCs are exempt from some of the disclosure and reporting requirements of Dodd-Frank and Sarbanes-Oxley (SOX). The Dodd-Frank stuff is boring: they don’t need to hold the (non-binding, merely advisory, totally feeble) Say-On-Pay votes, or the make disclosures on executive pay. Shareholders have only thrown a hissy fit about executive pay when a Company’s stock price is in the dumps, and these weren’t particularly costly reporting requirements to comply with (most companies should have at least a vague idea of what they pay their named executive officers), so nothing too exciting yet.
But Title I goes on to exclude EGCs from Section 404(b) of SOX, which requires a public company’s auditors to sign off on the company’s internal control. It also preempts (for EGCs only) any move by the Public Company Accounting Oversight Board to require audit firm rotation or have the auditing firm include a discussion and analysis in its reports. (Both are being considered by the PCAOB right now). Moreover, the JOBS Act fiddles with Section 7(a) of the Securities Act, so an EGC won’t need to present more than 2 years of audited financial statements in its IPO registration statement and only need to give the financial data required by Item 301 of Reg. S-K for the same period they give audited financials. Right now, the requirements are the last 3 and 5 years, respectively; the JOBS act effectively makes both 2 years.
Rightly or wrongly, SOX has been blamed by many for the decline of the American IPO. Unlike the other provisions of the JOBS Act, this change at least seems aimed at making it easier (read: cheaper) for an “emerging” company to go public. That said, I think once you get around $1 Billion in revenues, you aren’t emerging anymore: you’ve emerged.
$1 Billion is quite a lot of money. Certainly more than I have in under my mattress. SEC Commissioner Luis Aguilar estimated that this threshold would cover 98% of IPOs. Professor Ritter has that number closer to 94%. Either way, this means that it covers pretty much damn near everyone. This provision has seen almost as much ink spilled over it as Crowdfunding. One claim I keep seeing is that investors will avoid EGCs like teetotalers avoid dimly lit dive bars, favoring companies that bask in the disinfecting rays of sunlight that come from more disclosure. I don’t buy it. You might see a few companies that qualify for EGC status making more rigorous disclosures anyway, but I suspect these will be limited to issuers with checkered pasts. Of course, if I’m wrong, then there is no harm in reducing this regulatory burden, because any rational issuer will prefer to take on the more onerous disclosures in order to appease investors (and thereby improve the stock price, which tends to be the metric that drives management decisions).