This Practical tip focuses on the timing of the loss of "emerging growth company" (EGC) status and the implication of losing that status on SEC filings.
Title I of the JOBS Act granted special accommodations to a newly designated class of companies called emerging growth companies (EGCs). An EGC is an issuer that (1) had total annual gross revenues of less than $1 billion during its most recently completed fiscal year, (2) did not sell common equity securities using an effective Securities Act registration statement on or before December 8, 2011 and (3) has not triggered any of the disqualifying criteria described below.
The accommodations available to EGCs include (1) availability of a confidential filing process until 21 days prior to the issuer’s roadshow, (2) the option to present two years of audited financial statements in its equity initial public offering materials instead of the three years typically required for companies that are not smaller reporting companies, (3) the option to omit certain selected financial data preceding the earliest audited year presented in its initial registration statement, (4) deferral of any requirement to obtain an audit of the company’s internal control over financial reporting, and (5) the option to adopt new or revised accounting standards on the same timeline as private companies, if the standard is applicable to both public and private entities. To find more information on these and other accommodations available to EGCs, refer to Dataline 2012-03.
This Practical tip focuses on the timing of the loss of EGC status.
An issuer that is an EGC as of the first day of its fiscal year will continue to be an EGC until the earliest of:
Once EGC status is lost, it generally cannot be regained.
EGCs should carefully consider these four disqualifying provisions because current interpretive guidance does not provide any transition period for companies that exit EGC status. In other words, an EGC status change will be applied from the date on which the change occurred.
An issuer that exits EGC status should ensure that its annual report for the year of the change in EGC status conforms to the requirements for a non-EGC public company (taking into account other applicable designations such as accelerated filer status, newly public company status or smaller reporting company status). However, the SEC will not object if an issuer that has lost its EGC status does not present, in subsequently filed registration statements and periodic reports, selected financial data or a ratio of earnings to fixed charges for periods prior to the earliest audited period presented in its initial Securities Act or Exchange Act registration statement. For instance, a company that was not previously required to obtain an audit of its internal control over financial reporting because it was an EGC may be required to obtain one for the year of change in EGC status (unless it is exempt under another status, for instance, if it is a non-accelerated filer).
The SEC staff provided guidance on this topic in FAQs 3, 17, 40, and 50 of JOBS Act FAQs: Generally Applicable Questions on Title I of the JOBS Act and in Financial Reporting Manual (FRM) 10110.4. Because there are no transition accommodations, EGCs should regularly track matters that may cause them to exit EGC status. Loss of EGC status could result in significantly increased financial reporting and compliance requirements.
PwC clients that have questions about this Practical tip should contact their engagement partner. Engagement teams that have questions should contact Mila Petrova (1-973-236-5601) or Anil Persad (1-973-236-5009) in the National Professional Services Group.