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The IPO on-ramp under the JOBS Act 4.1 The JOBS Act: Emerging growth company status Fenwick & West LLP (a) Background In April 2012, President Obama signed into law the JOBS Act. One of the aims of the JOBS Act was to increase the number of companies electing to complete an IPO and to provide those companies a transition period, or “on-ramp,” to the public markets, allowing them to focus resources on growth of their businesses before having to expend resources toward complying with many of the regulations often cited as costly and burdensome for newly public companies. The so-called IPO on-ramp provisions, which are contained in Title I of the JOBS Act, reduce a number of existing financial disclosure, corporate governance and other regulatory burdens on a new category of issuer, referred to as an “emerging growth company.” (b) Qualifying as an emerging growth company Subject to certain exceptions, an EGC is defined as an issuer of securities that had gross revenues of less than $1 billion during its most recently completed fiscal year. An issuer would qualify as an EGC even if its gross revenues exceeded $1 billion in years prior to its most recent fiscal year. Gross revenues are measured with reference to 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. When calculating gross revenues, financial institutions may exclude gains and losses on dispositions of investment portfolio securities. (c) Length of transition period An issuer that is an EGC as of the first day of that fiscal year will continue to maintain that status until the earliest of: • the last day of the fiscal year in which it achieves $1 billion of gross revenues; • the last day of the fiscal year that includes the fifth anniversary of its IPO; • the date on which it has issued more than $1 billion in nonconvertible debt during any previous rolling three-year period (excluding issuances in A/B debt exchange offers); or • the date on which it is deemed to be a “large accelerated filer” (which requires, among other things, having common equity held by nonaffiliates with a market value of $700 million or more). 4.2 Advantages of emerging growth company status Fenwick & West LLP (a) Overview The IPO on-ramp provisions of the JOBS Act offer EGCs a number of advantages during the IPO process, including: • confidential submission and review of IPO registration statements; • reduced financial statement audit and disclosure requirements; • reduced executive compensation disclosure requirements; • the ability to engage in oral or written “test-the-waters” communications with certain types of potential investors to gauge interest before or after filing; and • liberalization of the use of research reports and easing of restrictions on analyst communications. The IPO on-ramp provisions of the JOBS Act also reduce the costs and burdens of being a public company for EGCs after completion of their IPOs by providing: • an exemption from the public accounting firm attestation to issuer internal controls required by Section 404(b) of the Sarbanes-Oxley Act; • scaled-back financial and compensation disclosure requirements for future registration statements, periodic reports and other reports to be filed with the SEC; • exemptions from “say-on-pay” votes (and votes on the frequency of “say-on-pay” votes), certain other required shareholder actions and certain proxy statement disclosures; • exemptions from mandatory audit firm rotation and any auditor’s discussion and analysis requirements; and • relief from the requirement to comply with any update issued by the FASB to its Accounting Standards Codification until the date that a company that is a private company is required to comply with such new or revised accounting standard if such standard does not apply to private companies. In this regard, EGCs that are foreign private issuers and that reconcile their home country GAAP financial statements to U.S. GAAP may also take advantage of the extended transition period for complying with updates issued by the FASB to its Accounting Standards Codification in their U.S. GAAP reconciliation. (b) Confidential submissions EGCs have the option to confidentially submit to the SEC a draft registration statement for confidential, nonpublic review by the SEC prior to public filing. This allows an EGC to explore the possibility of an IPO without exposing any confidential information to its competitors or the market generally until 21 days before the date on which it begins to conduct its roadshow (see Section 3.4(b)) and without risking the embarrassment associated with pulling the IPO should the EGC do so. The confidential submission process is only available for EGCs that have not already completed a public offering of common equity securities, including offerings under employee benefit plans or pursuant to a resale registration statement. EGCs that have completed public offerings of debt securities may use the confidential submission process. Foreign private issuers may also be eligible to submit their draft registration statements on a nonpublic basis under existing policies of the SEC’s Division of Corporation Finance; however, the benefits of this policy are not available to foreign private issuers that take advantage of any benefit available to EGCs. 44 NYSE IPO Guide
The IPO on-ramp under the JOBS Act (c) Scaled disclosures EGCs may “scale back” financial and compensation disclosures in their IPO registration statements and subsequent filings under the Exchange Act. In particular, IPO registration statements for EGCs may contain: • two years of audited financial statements, including those of acquired businesses, rather than the three-year requirement described in Section 2.2(a); • selected financial information for the years including and after the earliest audited period presented (i.e., as little as two years of selected financial information), rather than the five-year requirement described in Section 2.2(a); • MD&A for the periods covered by the audited financial statements (i.e., as little as two years plus “stub” periods), rather than the periods described in Section 3.3(a); and • the streamlined and simplified compensation disclosures required of smaller reporting companies, meaning that that the registration statement need not include, among other things, a detailed compensation discussion and analysis section or tabular information for more than three executive officers and certain executive compensation tables. With respect to the scaled executive compensation disclosure requirements, EGCs must still consider whether there is additional, material compensation disclosure that would be useful to investors to understand how the EGC’s executive compensation programs operate. EGCs may follow all or some of these “scaled” disclosure provisions, except in their initial filing or submission they must decide whether to take advantage of the extended transition period for complying with any of the FASB’s updates to its Accounting Standards Codification. If an EGC decides to take advantage of such an extended transition period, it may later choose to reverse its election. Although the JOBS Act refers to domestic company rules and forms, a foreign private issuer that qualifies as an EGC may comply with the scaled disclosure provisions to the extent relevant to the form requirements for foreign private issuers. While these changes are designed to reduce costs, EGCs may find that providing the traditional level of historical financial disclosure is helpful in the IPO marketing process. In the first year subsequent to the enactment of the JOBS Act, most EGCs have still presented financial statements for a full three years and also five years of selected financial data. (d) Test-the-waters communications As discussed in Section 3.2(b), issuers must avoid illegal offers and not engage in communications and activities that might be viewed as impermissibly affecting the market for the securities to be offered. The JOBS Act amends Section 5 of the Securities Act to add a new Section 5(d), which permits EGCs to engage in oral and written communications with institutional or highly sophisticated prospective investors to gauge their interest in a contemplated securities offering before or during the “quiet period” or during the “waiting period” described in Section 3.2(a). These communications are not a substitute for the traditional roadshow and book-building processes described in Section 3.4(b) and (c). While practices in this area are evolving, issuers should pay careful attention to the timing, content and delivery mechanism of each communication. In particular, written communications are subject to SEC review and could complicate the IPO process if they are inconsistent with the prospectus or roadshow presentation. The SEC has been requesting copies of any “testing-the-waters” communications made in reliance on Section 5(d) as well as any research reports. (e) Other benefits The “IPO on-ramp” provisions make becoming a public company more attractive by reducing costs and burdens for EGCs after they go public, often by simplifying and streamlining disclosures. One of the most significant of these benefits is an exemption from the requirement contained in Section 404(b) of SOX to obtain an internal controls attestation and report from a registered independent public accounting firm while the issuer remains an EGC. For many, perhaps most, companies seeking to complete an IPO, this will delay by at least three years the need to comply with this requirement of SOX. It should be noted, however, that, as explained in Chapter 2, EGCs will still be required to establish and maintain disclosure controls and procedures and internal controls, and their principal executive officer and principal financial officer will still be required to certify Form 10-Q and 10-K filings. 4.3 Process timeline Fenwick & West LLP The time-intensive process of submitting confidentially and executing an IPO as an EGC can take the 12 to 16 weeks from initial filing to effectiveness it typically takes for a non-EGC issuer to complete the process described in Section 3.1. As with IPOs of non-EGC issuers, the exact time taken to complete an IPO for an EGC can vary widely and depends on market conditions, the complexity of the transaction, the EGC’s readiness prior to embarking on the IPO process and many other factors. Like the process outlined in Section 3.1, the IPO process for EGCs can be broken down into the following stages. (a) Prior to official IPO process launch Decision to go public: While the EGC should still evaluate its internal readiness, including industry position and growth prospects, it also has the flexibility to assess investor interest in a contemplated offering of its securities, to determine whether it is ready to go public. Testing the waters: The EGC and its advisors should consider whether to engage in test-the-waters communications with “qualified institutional buyers” or “accredited investors” to gauge interest in a contemplated offering of its securities. Internal controls: Once the decision has been made to prepare for an IPO, the EGC should still take the actions other issuers take: select an appropriate board of directors, prepare audited financials (with a qualified independent registered public accounting firm), and begin establishing internal controls. Selection of advisors: The EGC should still carefully select its IPO advisors, including NYSE IPO Guide 45
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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Contributor profiles Morrow & Co.,
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