Update on emerging growth companies and the JOBS Act
The Jumpstart Our Business Startups Act (“JOBS Act”) was enacted on April 5, 2012. The principal goal of the JOBS Act was to encourage private companies to raise capital through an IPO. The Act was initially contemplated in March 2011 when it was determined that a long-term decline in US IPOs could result in a loss of up to 22 million American jobs. The two main objectives of the JOBS Act are:
- To create an “IPO on-ramp” which reduces the filing and disclosure burdens associated with undertaking an IPO.
- To provide companies easier and broader access to the capital markets.
Did it accomplish its goal?
- Since enactment, we have seen an uptick in the number of IPOs of nearly 25%*;
- More than 80% of all U.S. IPO pricings since enactment have been by entities that qualify as EGCs;
- An increasing number of EGC filers are taking advantage of the accommodations and exemptions available under the JOBS Act.
*Calculated as total IPOs in the six year period since enactment over total IPOs in the six year period prior to enactment
Although most companies filing as an EGC chose not to take the relief for the extended timeline to adopt new accounting standards, the trend took a notable turn in 2017
The number of EGCs choosing not to elect the private company timeline increased every year and peaked in 2016 before declining precipitously to its lowest level in 2017, with about 70% of EGCs ‘opting out‘ of the accommodation. The decrease coincides with the public company effective date of ASC 606, Revenue from contracts with customers (Dec. 15, 2017). Adoption and implementation of ASC 606 has been onerous and more time consuming for many companies than originally anticipated. Accordingly, we’ve seen a significant uptick in the percentage of companies electing the private company adoption timeline. However, even if a company chooses to adopt the private company timeline, they can still choose to over-disclose.
More EGCs are choosing to present less than five years of selected financial information
As an EGC, a company may omit certain periods for selected financial information presentation within the registration statement. Companies need only to include the periods reflected in the audited financial statements. Since enactment, the number of EGC’s disclosing only two years of selected financial information has increased from 21% to 70%. The trend is consistent with that of audited financial statements as companies generally include only the same number of periods in the selected financial information as reflected in the audited financial statements.
Most companies filing as an EGC disclosed compensation for less than 5 named executives
There is a consistent trend across all sectors since enactment, of companies disclosing compensation information for less than the required five named executive officers and other reduced disclosure requirements related to compensation. This is likely due to the level of time and effort to prepare Compensation & Discussion Analyses within the registration statement.
Will the trend continue?
Companies have shown strong support for the JOBS Act since its enactment six years ago. Any initial apprehension of electing to take the accommodations available under the Act has slowly faded, as the market has been open to scaled back disclosures / financial data. These trends are expected to continue and companies considering IPOs that qualify as EGCs should pay close attention to the broader market and industry specific trends for election of accommodation/exemptions under the JOBS Act. Adequate evaluation and election of the available accommodations/exemptions can help to defray the costs and decrease the time it takes to go public.
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