JOBS Act—Frequently Asked Questions
Following the April 5, 2012, signing of the JOBS (Jumpstart Our Business Startups) Act by President Obama, there has been considerable discussion and even some formal guidance from the Securities and Exchange Commission (SEC).
Much rulemaking is yet to come, but the following FAQs should help readers to better understand several key provisions of the Act. The questions are grouped as appropriate as some of the JOBS Act provisions are applicable, for example, to only public companies or companies considering a public offering.
Status as an Emerging Growth Company
1. What is an Emerging Growth Company (EGC)?
Answer: Essentially, an Emerging Growth Company is any company that had revenues of less than $1 billion for its most recently completed fiscal year (to be adjusted every five years for inflation). An EGC will continue to qualify as an EGC until the earliest to occur of (i) its annual revenues exceed $1 billion, (ii) it becomes a large accelerated filer under SEC rules, (iii) it issues more than $1 billion in non-convertible debt over the previous three year period, or (iv) the fifth anniversary of the first sale of common equity securities in a registered offering.
2. For purposes of the $1 billion revenue test for EGCs, when is the measurement period?
Answer: The company's or predecessor's last completed fiscal year (generally as presented as total revenues on the income statement in accordance with U.S. GAAP). This is true for the definition of "Emerging Growth Company" under the Securities Act of 1933 and under the Securities Exchange Act of 1934.
3. What if the company reported total revenues in excess of $1 billion in prior years but reported less than $1 billion in its most recently completed fiscal year?
Answer: The Act appears to allow such a company to technically qualify as an EGC, but careful thought would need to be given to whether or not to take advantage of the scaled disclosure and other options provided by the Act.
4. What if the company has revenues of less than $1 billion, later reports total revenues of more than $1 billion and then falls below $1 billion during the five year period?
Answer: Once an EGC exceeds the $1 billion total revenue threshold [or otherwise is bumped out by the other triggers (e.g., by becoming a large accelerated filer)], the company can no longer qualify as an EGC.
5. When is the $700 million public float calculated for purposes of the large accelerated filer disqualifier?
Answer: At the end of the company's second quarter to be effective at the end of the fiscal year if the other elements of becoming a large accelerated filer are satisfied. For example, a company with a Dec. 31 fiscal year end that has been a public reporting company for at least 12 months, that has filed at least one annual report to stockholders and that had a public float of at least $700 million as of June 30 would become a large accelerated filer on Dec. 31 of that year.
6. What is the appropriate measurement date for a company wishing to file a registration statement for its initial public offering (IPO) with the SEC on a confidential basis as allowed by the Act?
Answer: The Company must qualify as an EGC at the time it submits a confidential registration statement with the SEC. During registration, if total revenues in excess of $1 billion are reported, then the company would have to publicly file its registration statement. Importantly, if after the filing of the registration statement the company loses its EGC status, it may still comply with the scaled disclosure provisions applicable to EGCs through the completion of the offering. The SEC has indicated, however, that if the registration is submitted confidentially at a time when the company qualified as an EGC but no longer qualifies after the registration statement is actually filed, then the scaled disclosure otherwise available to EGCs would no longer be available.
7. If the company initially filed its registration statement under the 1934 Exchange Act (e.g., because it had more than 500 shareholders of record), will the company still be eligible to become an EGC?
Answer: Yes if it otherwise qualifies. Also, it is possible that such a company could continue as an EGC well beyond the typical five year period so long as it did not report annual revenues in excess of $1 billion or sell equity securities in a registered offering under the 1933 Securities Act.
8. What is the applicable qualification date for companies wishing to "test the waters" prior to an offering?
Answer: The company must qualify as an EGC at the time of the "test the waters" communications. (See further FAQs below regarding "test the waters.")
Scaled Disclosure Opportunities under the JOBS Act
9. What is meant by "scaled disclosure?"
Answer: EGCs may opt to provide certain reduced disclosures under the SEC reporting requirements applicable to smaller reporting companies (typically those with a public float of less than $75 million).
10. May companies that qualify as an EGC pick and choose among the scaled disclosure options available?
Answer: Yes, but remember that the option to take advantage of the ability to comply with any new or revised financial accounting standards applicable to private companies must be exercised at the time of the company's first periodic report (or in their next filed registration statement amendment) and the election is subsequently irrevocable. Importantly, this opportunity is structured as an "opt out" option for EGCs, so EGCs that wish to comply with the same accounting standards transition rules and schedules applicable to non-EGC public companies must timely opt out and notify the SEC staff of its decision.
11. Are "Say on Pay" advisory vote requirements impacted?
Answer: For EGCs the answer is yes (potentially for five years). For companies that qualify as EGCs but lose their EGC status within two years of their initial equity offering, they will have three years from the date they cease to qualify before the executive compensation advisory vote requirements will become applicable (and one year for all other EGCs). Obviously, some public companies that qualify as an EGC will decide to comply and request the advisory votes anyway.
12. May companies, for example, decide to comply with the financial statement presentation requirements as if they were not an EGC but take advantage of the scaled executive compensation disclosure as applicable to smaller reporting companies (again, typically those with a public float of less than $75 million)?
13. May an EGC that completed its IPO after Dec. 8, 2011, but before April 5, 2012, include scaled disclosures in its periodic reports going forward? What about in future registration statements?
Answer: Yes and yes so long as the company continues to qualify as an EGC. Consider, however, whether this scaled disclosure is in the long-term best interest of the company particularly if its life as an EGC may be short. In the short run, opting for this scaled disclosure may also cause a greater likelihood of the often time-consuming and expensive SEC staff comment process.
14. Would the ability of an EGC to include less than three years of financial statements also apply to acquired businesses if the materiality thresholds would otherwise require three years?
Answer: Yes. The SEC has indicated that it would not object if an EGC included only two years of financial statements for the acquired business (so long as the EGC only presents two years).
15. Will any decision to take advantage of the scaled disclosure impact the CEO's and CFO's ability to comfortably sign their annual and quarterly certifications?
Answer: Not typically, particularly since the SEC has provided specific guidance that compliance with the terms of the JOBS Act in this regard would be fully consistent with the periodic reporting rules of the 1934 Exchange Act.
16. What about a decision to defer the requirement to obtain an independent auditor's attestation regarding internal controls over financial reporting? Would this still be in compliance with the rules and would the executive still be able to sign the required certifications?
Answer: Yes so long as the company qualifies as an EGC.
17. How will the financial community and investors react if EGCs elect to provide this scaled disclosure and defer the independent auditor internal controls attestation?
Answer: Good question. We are about to find out.
"Test the Water" Communications
18. With whom can EGCs (and their representatives) communicate regarding possible interest in a securities offering and not violate standard SEC gun-jumping or quiet period restrictions?
Answer: Only potential investors who qualify as accredited investors or qualified institutional buyers.
19. May these communications take place both before and during the offering?
Answer: Yes, although underwriters will likely strive to coordinate all such communications and require appropriate comfort regarding the timing and content of such communications (and confirmation that any such communications were only with those who are clearly accredited investors or qualified institutional buyers). Likewise, companies will want to carefully monitor any such communications undertaken on its behalf.
20. May these communications also take place in registered offerings after the IPO?
Answer: Yes so long as the company qualifies as an EGC. Of course, there will be Regulation FD issues to consider.
21. Will the JOBS Act make current roadshows a relic of the past?
Answer: Likely yes and no. For EGCs, the ability to meet with and present to potential investors who typically are invited to roadshows will probably result in front-end loaded efforts to test investor appetite and possible pricing. For IPOs, these discussions may be in advance of and/or during SEC staff review of confidentially filed registration statements. It is also likely that there will still be "standard" roadshows by EGCs but with the number and time periods reduced (with CEOs and CFOs of emerging growth companies already rejoicing).
22. What about testing the waters in advance of debt offerings by EGCs?
Answer: The same rules apply as the JOBS Act language in this regard is not limited to equity offerings.
Analysts, Research Reports and Related Matters
23. Do the new rules mean that research reports may now be issued before and during an equity offering, including an IPO?
Answer: Yes if they relate to an EGC. The same is now true immediately after the offering. However, current Financial Industry Regulatory Authority (FINRA), New York Stock Exchange (NYSE) and other rules regarding pre and post-offering analyst communications and reports remain on the books. We expect rulemaking to come and activities by broker-dealers and their analysts to be somewhat cautious until the new rules are out.
24. What analysts are included in the JOBS Act?
Answer: Only those analysts who are employed by a broker-dealer although the formal title of analyst is not a requirement.
25. Even if the broker-dealer is involved in the offering?
26. Are the new rules limited to IPOs?
Answer: No, but they are limited to equity offerings by EGCs.
27. Can investment bankers and analysts now be in the same room or on the same telephone call?
Answer: No. This important separation must continue under current rules both before and during the offering.
28. Do the current restrictions on research reports after the offering around a lock-up expiration still apply?
Answer: Under the JOBS Act, neither the SEC nor FINRA may adopt or maintain any rules that would restrict the distribution of research reports on an EGC or from "making a public appearance" either following the EGC's IPO or prior to the expiration of any lock-up period. Thus, current FINRA (and likely NYSE) imposed quiet periods following the IPO and prior to the lock-up expiration date technically cannot be/will not be enforced. Look for new rules to line up with these new statutory carve outs for EGCs. Also look for investment banking firms to develop new policies and procedures in light of these new JOBS Act provisions applicable to EGCs.
General Solicitation and Advertising
29. Are the old rules prohibiting general solicitation and advertising in private offerings out the window?
Answer: No, current rules and restrictions remain in place until the SEC adopts new rules. The SEC is required by the JOBS Act to revise its rules in this regard no later than 90 days from the JOBS Act enactment (or July 4, 2012). Do not be surprised if the rule-making takes longer.
30. Will the rules allow companies, including private equity funds, to promote private offerings by advertising and general solicitation?
Answer: Yes but only if the companies have taken reasonable steps to verify that the purchasers are accredited investors or, in the case of qualified institutional buyers, the issuer reasonably believes the buyer so qualifies. We shall see what the SEC proposes in its rules, but this "verify" language is different than the current language regarding accredited investors. We also expect to see additional SEC guidance to confirm that private equity funds would not violate the Investment Company Act by engaging in such general solicitation activities.
31. What is crowdfunding?
Answer: The ability of companies to raise small amounts of money from a very large number of investors. Think of this as being similar to what President Obama and other politicians have done in the past and are doing currently, particularly with the power of the internet and social media.
32. Is crowdfunding currently legal?
Answer: No, and the SEC has gone out of its way to make clear that the new crowdfunding exemption is not yet available. The SEC has 270 days from enactment (or until Dec. 31, 2012) to release rules exempting crowdfunding offerings from registration for offerings up to $1 million in any 12 month period.
33. Why are so many crowdfunding portals being formed or advertised?
Answer: Apparently, there is a view that such portals with a large number of "early" customers will somehow have an advantage over others. Look for the more experienced and thoughtful market players to formally register as a broker-dealer.
500 Stockholder Rule
34. What is the 500 Stockholder rule and why do we care?
Answer: In the past, privately-held companies have been concerned if it appears that they could be forced into becoming a public reporting company simply because they have more than 500 stockholders (that is, held of record).
35. What is the new limit?
Answer: Under the revisions to the 1934 Exchange Act (and effective immediately), the "held of record" threshold is now either 2,000 persons or 500 persons who are not accredited investors. Importantly, "held of record" now does not include employees who become stockholders under company equity incentive plans via stock options or restricted stock grants (with safe harbors to come from the SEC). Separate rules apply to banks and bank holding companies.
36. Will the new stockholder limit impact private equity funds?
Answer: Yes, but the Investment Company Act was not amended by the JOBS Act so its provisions will still apply.
37. Will crowdfunding purchases count toward the limit?
Answer: No but the SEC must adopt rules regarding how crowdfunding private offerings will work (by Dec. 31, 2012).
For more information on the JOBS Act, please contact Joseph DeGroff at (317) 236-2435 or firstname.lastname@example.org or any member of Ice Miller’s Private Equity and Venture Services Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.