Securities Law Blog

On March 31, 2017, the Securities and Exchange Commission (SEC) issued final rules that include an inflation-adjusted threshold in the definition of the term “emerging growth company,” as well as adopting self-executing provisions of the Jumpstart Our Business Startups (JOBS) Act and adjusting the dollar amounts raised and invested in Regulation Crowdfunding. Most significantly, the rules raise the annual gross revenue cap for a company to qualify as an EGC by $70,000,000, to $1,070,000,000 from the current $1,000,000,000 in gross revenues during its most recently completed fiscal year.

The final rules also revised the text and check boxes on the cover page immediately before the “Calculation of Registration Fee” table on Securities Act registration statements on Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4 to facilitate identification of EGC status of applicable issuers. Similar language has been added to Forms 10-K, 10-Q, 8-K (where there had been no such disclosure previously), 10, 20-F and 40-F under the Exchange Act. In each case, an issuer will still need to check the other applicable issuer type box for non-accelerated filer, smaller reporting company or other filer. Additionally, a new paragraph has been inserted on the cover page of each filing below the issuer type check boxes for the EGC to elect whether it will take advantage of JOBS Act rules that permit EGCs to defer adoption of new or revised accounting standards.

An example of the new disclosure impacting almost every registration statement and periodic report follows:

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

* * * * *

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

* * * * *

When adopted in April 2012, Title I of the JOBS Act added new Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Exchange Act to define the term “emerging growth company.” Pursuant to the original statutory definition, the SEC was required every five years to adjust the annual gross revenue amount used to determine EGC status in order to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.

The SEC’s technical rule amendments update various rules in Regulations S-K and S-X to include references to various JOBS Act provisions that benefit EGCs (as noted below). While the EGC benefits are not new, the technical amendments include instructions interspersed within the applicable itemized provisions to make it more convenient for issuers and their counsel and accountants to check the particular disclosure rules of particular Securities Act and Exchange Act filings to see what applies, or does not apply, to EGCs. The SEC’s final rules remind issuers of the reduced regulatory and reporting requirements currently offered to EGCs for up to five years after their IPO. These benefits include:

• permission to include only two years (rather than three years) of audited financial statements in its common stock IPO registration statement;
• permission to provide Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosures that correspond only to the financial statements included in its IPO registration statement;
• permission to omit in other Securities Act registration statements filed with the SEC selected financial data for any period prior to the earliest audited period included in its IPO registration statement;
• permission to omit selected financial data for any period prior to the earliest audited period included in its first registration statement that became effective under the Exchange Act or Securities Act in any Exchange Act registration statement, periodic report or other report filed with the SEC;
• exemption from the advisory shareholder votes on say-on-pay, say-on-frequency and golden parachute compensation arrangements with its named executive officers;
• permission to comply with the smaller reporting company disclosure requirements regarding executive compensation;
• permission to defer compliance with any new or revised financial accounting standards; and
• exemption from Sarbanes-Oxley Act requirements for auditor attestation of internal control over financial reporting.

Current EGCs should be reminded to review their boilerplate EGC disclosures to reflect the higher revenue threshold and other changes.

The final rules will go into effect when they are published in the Federal Register, which is expected to occur this or next week. The revised rules and forms will need to be followed for upcoming Form 10-Qs for the quarterly period ended March 31, 2017.