With H.R. 3606, or most commonly referred to as the “JOBS” Act (Bill Summary | Bill Text PDF), likely to be signed into law this week by President Obama, there are some new changes that may be of help to startup and small companies. In addition to the so-called crowdfunding exemption from securities registration which allows pooling of small amounts from investors to fund a company, the JOBS Act puts in place regulations that carve out a category called “emerging growth companies” which have an intermediate level of reporting obligations with the SEC. It is between the level of disclosures required for a fully reporting large company and a private, non-reporting company. This could be a very good help for these small to middle market companies to ease the burden of time and expense in being a fully reporting company.
An emerging growth company is defined as a company with less than $1 billion in annual gross revenue; however, the company loses that status upon hitting certain targets related to the amount of debt securities issued, after 5 years of first having sold stock per an effective registration statement, or upon being declared a large accelerated filer under SEC rules.
The new rules for an emerging growth company (EGC) is to exclude it from some of the restrictions imposed under the Sarbanes-Oxley Act or Dodd-Frank Act. EGCs are excluded from the requirements of say-on pay executive compensation disclosures and other proxy disclosures under Dodd-Frank. EGCs are also not required to comply with the internal controls audit requirements of SOX. The JOBS Act also requires the SEC to review Regulation S-K and make any changes to make it easier and less costly for companies to register their securities under that regulation. It is not required to implement those, but the SEC must transmit its recommendations for streamlining registration of EGC securities within 180 days of implementation of the JOBS Act. An EGC need not provide more than the last 2 years audited financial statements in an IPO registration statement and further reporting obligations do not need to include the selected financial data normally required under Section 229.301 of the Code of Federal Regulations under Regulation S-K. However, smaller reporting companies were already excluded from this requirement under Section 229.10(f)(1) for those companies that meet the$75 million in public float or $50 million in annual revenue test.
It is hard to tell how much actual impact this will have or what the SEC will propose for further ways to reduce the burden on these small to middle-market companies. The EGCs still have to hire auditors and law firms, even though they may not have to fully comply with all of the SOX or Dodd-Frank requirements at first. The cost and time to prepare more than 2 years audited financials, disclose compensation ratios, or providing selected financial data may not be a large incremental increase versus standard disclosures and audit requirements. It will probably end up being a recommended best practice to simply get used to going through those corporate governance motions and disclosures just to be prepared for the future anyways.