On September 28, the Division of Corporation Finance of the Securities and Exchange Commission published an additional set of frequently asked questions (FAQs) regarding Title I of the Jumpstart Our Business Startups Act (JOBS Act), which was enacted on April 5. Title I of the JOBS Act includes reforms intended to facilitate capital raising by “emerging growth companies” (EGCs), such as allowing EGCs to submit draft registration statements on a confidential basis to the SEC. Title I of the JOBS Act became operative upon enactment.
Which companies can qualify as EGCs?
Generally, the analysis of whether an issuer is determined to be an EGC focuses on whether the issuer meets EGC requirements and not on the issuer’s parent. However, if it appears that the issuer or its parent is engaging in a transaction for the purpose of converting a non-EGC into an EGC or obtaining EGC status benefits indirectly, the SEC may question the issuer’s EGC status.
If an issuer that was once a reporting company under the Securities Exchange Act of 1934 (the Exchange Act) but is no longer required to file Exchange Act reports would qualify as an EGC but for the fact that its initial public offering occurred on or before December 8, 2011, then the issuer may qualify as an EGC. However, if it appears that the issuer ceased to be a reporting company for the purpose of becoming an EGC, the SEC may question the issuer’s EGC status.
An issuer’s most recently completed fiscal year is used to determine whether an issuer qualifies as an EGC, regardless of whether the issuer presents financial statements for that year in its registration statement.
The Division of Corporation Finance provided additional guidance with respect to the application of the $1 billion annual revenues test, the five-year anniversary test, the $1 billion issued debt test and the large accelerated filer test for companies involved in forward acquisitions and reverse mergers with operating companies.
How should an EGC make its filings with the SEC and communicate with investors?
An EGC may use the confidential submission process under Section 6(e) of the Securities Act of 1933 (the Securities Act) to submit a draft registration statement for an exchange offer or merger that constitutes its initial public offering of its common equity securities. If an EGC uses the confidential submission process with respect to an exchange offer, it must publicly file the registration statement (including the confidential submission) at least 21 days before the road show or anticipated effective date of the registration statement, but no later than the date of commencement of the exchange offer. Such EGC must also make the required filings under the Securities Act and the Exchange Act for test-the-waters and pre-commencement tender offer communications and must file a tender offer statement on Schedule TO on the date of commencement of the exchange offer. In a merger where an EGC is acquiring a target company subject to Regulation 14A or 14C and the EGC’s registration statement includes a prospectus that serves as the target company’s proxy or information statement, the same timing applies with respect to filing the registration statement, and the EGC must make the required filings under the Securities Act and the Exchange Act for test-the-waters communications and soliciting material.
Upon public filing of an initial confidential submission of a draft registration statement, the public filing is not required to be signed by the issuer or its officers or directors, and is not required to include consents of auditors or other experts.
EGCs may use test-the-waters communications with qualified institutional buyers and institutional accredited investors in connection with exchange offers or mergers, but must make any required filings under the Exchange Act for such written communications.
What are the financial statement disclosure requirements applicable to EGCs?
An EGC that is not a shell company and presented only two years of financial statements in its registration statement may present only two years of financial statements for a target company that does not qualify as a smaller reporting company in the EGC's registration statement for the exchange offer or merger.
An EGC that is not a shell company that presented only two years of financial statements in its registration statement for its initial public offering, and has not yet filed three years of financial statements in a Form 10-K, may present in a Form 8-K only two years of financial statements for an acquired business.
Section 7(a)(2)(A) of the Securities Act, which permits inclusion of only two years of financial statements, applies only to registration statements for initial public offerings of common equity securities. If an EGC that has not done an initial public offering of common equity securities is required to register securities under Section 12(g) of the Exchange Act, it must present three years of financial statements in its registration statement on Form 10 or Form 20-F. Likewise, if an EGC that has not done an initial public offering of common equity securities does a public offering of debt securities, it also may not rely on Section 7(a)(2)(A).
If an issuer loses its EGC status, it is not required to present selected financial data or a ratio of earnings to fixed charges in subsequently filed registration statements and periodic reports for periods prior to the earliest audited period presented in its initial registration statement.
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