In order to stimulate job growth President Obama, on April 5, 2012, signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act is intended to increase American job creation and economic growth by improving access to the public capital markets for smaller companies by relaxing regulatory restrictions applicable to private offerings, initial public offerings and certain newly public companies. One of the highlights of the JOBS act is that it simplifies the initial public offering process for entities falling into a newly established category of issuer referred to as the Emerging Growth Company (EGC). A company with annual gross revenues of less than $1 billion during its most recently completed fiscal year, including foreign private issuers, is now defined by the JOBS Act to be an EGC. An issuer will not qualify as an EGC if it first sold its common stock in an IPO prior to December 8, 2011. An issuer that is deemed to be an EGC as of the first day of that fiscal year will continue to be an EGC until the earliest of (i) the last day of the fiscal year in which the company achieves total revenues exceeding $1 billion; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of its IPO; (iii) its issuance of more than $1 billion in nonconvertible debt in any 3-year period; or (iv) the date on which it is deemed to be a large accelerated filer as defined under the Exchange Act. In order to make the IPO process more enticing to Emerging Growth Companies the JOBS Act allows EGC’s to explore conducting an IPO without disclosing sensitive information to the public and to withdraw an IPO prior to submitting any public filing with the SEC by permitting the company to:
- “Test the waters” by holding meetings with qualified institutional buyers and institutional accredited investors prior to, during, or following the initial filing of a registration statement; and
- Confidentially file S-1 or F-1 registration statements and subsequent amendments with the Securities and Exchange Commission, provided the initial confidential submission and all amendments are publicly filed at least 21 days prior to the start of any IPO roadshow.
To further encourage EGC’s to seek funding through the public capital markets the JOBS Act also relaxes the regulatory burdens of being a publicly traded company by not subjecting such companies to the following:
- The requirement to provide three years of audited financial statements. Emerging Growth Companies will be required to provide only two years of audited statements, including any interim financial statements; and
- The requirement for an auditor attestation of internal controls pursuant to Section 404(b) of the Sarbanes-Oxley Act. Note that the CEO and CFO of such companies will continue to be responsible for establishing and maintaining internal controls over financial reporting and for certifying those controls in its periodic filings; and
- The requirement to include the compensation discussion and analysis section of the proxy statement and other executive compensation disclosures under item 402 of Regulation S-K. Emerging Growth Company’s are allowed to provide the same level of disclosure regarding executive compensation that smaller reporting companies are currently subject to; and
- The requirement to seek annual approval of executive compensation in proxy or consent materials, commonly referred to as “say-on-pay” votes; and
- Rules under the Dodd-Frank Act that have yet to be enacted which would require companies to disclose the relationship between executive compensations and the company’s financial performance, and the ratio of the CEO’s total annual compensation in comparison to the median of the total annual compensation of all employees of the company; and
- New or amended financial accounting standards until such time as the accounting standard, or amendment to, becomes widely applicable to private companies; and
- Any rules of the Public Company Accounting Oversight Board (PCAOB) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer.
Another significant change brought about by this Act is that an EGC will be permitted to simultaneously engage in a public offering as well as a private placement of a public entity (PIPE offering) to accredited investors or qualified institutional buyers, without risking that the discussions with respect to the PIPE offering will be considered to be a sale of a security absent an effective registration statement. The JOBS Act also reduces the restrictions on research reports and research analysts during an EGC’s IPO process. Currently, the research arm of an investment bank participating in an IPO is prohibited from publishing research about that specific issuer. Under the JOBS Act, this type of research is permitted and protects such research reports from being deemed part of the prospectus or from being misconstrued as an offer of sales of the securities without an effective registration statement. However the relaxing of regulatory requirements provided by the JOBS Act does not mean that research reports can be prepared without recourse as analysts and investment banks are still subject to the antifraud provisions of the federal securities laws. The JOBS Act also relaxes restrictions of the Financial Industry Regulatory Authority (FINRA) and the SEC that prevent analysts from meeting with potential IPO investors or from attending an IPO related meeting with an EGC and investment banking personnel. Furthermore, restrictions on the publication of research during specific timeframes during the IPO process, such as the period following the expiration of the lock-up period, are also removed. The JOBS Act is intended to significantly impact a broad range of companies, from start-ups seeking initial capital to newly public companies trying to reduce the cost burden of regulatory compliance. Although it has yet to be determined as to what kind of impact the JOBS Act will ultimately have on the public capital markets or if it’s intended purpose, which is to increase American job creation and economic growth, will actually come to fruition, it is certain, given the broad definition of the Emerging Growth Company, that this legislation will change the manner in which most IPO’s are conducted. The easing of the initial public offering process, the reduced disclosure obligations, and the ability to solicit interest in a contemplated offering without incurring the substantial legal and accounting costs that go hand-in- hand with preparing a registration statement will hopefully serve its intended purpose by “jumpstarting” the economy. by Brett Schrader, CPA, MSA