Learning objectives

• Recognize the eligibility requirements for emerging growth companies.
• Identify the scaled filing provisions.
• Recall the qualifications under the Fixing America’s Surface Transportation (FAST) Act of 2015.

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Knowledge check

1. Which is not included as eligibility criteria that must be met for a company to be defined as an emerging growth company under Title I of the JOBS Act?
   1. Have revenue of less than $1.07 billion in the most recently completed fiscal year.
   2. Issued less than $5 billion of nonconvertible debt in the most recently completed fiscal year.
   3. Not yet had, or had after December 8, 2011, its first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933.
   4. Issued less than $1 billion of nonconvertible debt in a three-year period.
2. Which statement describes emerging growth companies under Title I of the JOBS Act?
   1. Filers will maintain EGC status for five years following their IPO unless any of the disqualifying provisions are met.
   2. Filers will maintain EGC status for three years following their IPO unless any of the disqualifying provisions are met.
   3. Filers will maintain EGC status for four years following their IPO unless any of the disqualifying provisions are met.
   4. Filers will maintain EGC status for two years following their IPO unless any of the disqualifying provisions are met.

Knowledge check

3. Under the JOBS Act, EGCs are permitted to
   1. Comply with all smaller reporting company requirements.
   2. Adopt new accounting standards using the effective dates applicable to nonpublic companies.
   3. Exclude management’s report on internal controls.
   4. Omit selected financial data.
4. In an initial registration statement, EGCs may
   1. Omit MD&A discussion in a confidentially submitted registration statement.
   2. Limit the MD&A discussion to one year, even if two years of audited financial statements are provided.
   3. Limit the MD&A discussion to two years, even if three years of audited financial statements are provided.
   4. Limit the MD&A discussion to two years if two years of audited financial statements are provided.
5. Under the FAST Act, an EGC
   1. May include only one year of audited financial statements in its effective initial registration statement.
   2. May omit an annual period from its audited financial statements if that period will not be included in its effective registration statement at the time of its completed offering.
   3. May omit interim financial statements from its effective initial registration statement.
   4. May omit interim financial statements from its initial registration statement that are otherwise required if they relate to annual periods that will be required at the time of the offering.

EGC criteria

Subsequent to the issuance of the JOBS Act (and before the issuance of the FAST Act), SEC staff addressed the application of the criteria for EGCs to various fact patterns. As highlighted previously, the FAST Act provides an issuer that qualifies as an EGC at the time of its initial filing or submission with the ability to maintain its EGC status throughout the initial registration statement process, even if it was otherwise lost until the earlier of the EGCs completed offering or one year following the date the status was lost. This provision should be considered in addition to the guidance in the following examples about the EGC criteria:

• An issuer loses its EGC status as of any date on which it has issued more than $1 billion of nonconvertible debt securities during the prior rolling three-year period. Except for identical debt securities issued in exchanges of registered notes for unregistered notes, all nonconvertible debt securities — whether outstanding or not and whether issued in a registered offering or not — should be against the $1 billion limit.
• An issuer must apply the debt issuance test at the time of an IPO. The test must be performed when the issuer (1) engages in test-the-waters communications, (2) confidentially submits a draft registration statement, and (3) initially files the registration statement.
• The revenue test should be applied based on total annual revenues as presented on the income statement under U.S. generally accepted accounting principles (GAAP) (or under International Financial Reporting Standards set by the International Accounting Standards Board, if used as the basis of reporting by a foreign private issuer). Also, it should be applied based on the most recently completed fiscal year, whether or not the financial statements for that period are presented in the registration statement. For example, a company filing a registration statement in January 2019 that presents the financial statements as of and for the years ended December 31, 2017 and 2016, and as of and for the nine months ended September 30, 2018 and 2017, should perform the test using its revenues for the year ended December 31, 2018.
• A registrant loses its emerging growth status immediately upon crossing the $1 billion debt issuance threshold or the last day of the fiscal year during which it had total annual gross revenues of $1.07 billion or more. A calendar year-end registrant that crosses the $1.07 billion revenue limit or the $1 billion debt limit at any time during 2018 will need to obtain an audit of its internal control over financial reporting as of December 31, 2018, if it is an accelerated filer. The staff assumes that registrants are able to plan for crossing these thresholds and therefore will have adequate time to plan for and obtain an audit of their internal controls. If a registrant finds itself in a situation it could not have planned for and that situation causes the need for an internal control audit that is difficult or impossible to obtain, the registrant may contact the staff to discuss the possibility of relief from this requirement.

EGC rules and regulations

The SEC also addressed the following EGC rules and reporting requirements:

• The SEC has not amended its forms, Regulation S-X, or Regulation S-K to be consistent with the disclosure provisions for emerging growth companies as set forth in Title I. An EGC may comply with Title I’s disclosure provisions, even if doing so would be inconsistent with existing rules and regulations.
• A foreign private issuer that qualifies as an EGC can elect to file its Form 20-F using the scaled disclosure provisions available to emerging growth companies.
• EGCs may elect to adopt new or revised accounting standards using the effective dates applicable to nonpublic companies only if the standard was issued after April 5, 2012, and is applicable to nonpublic companies. The election is disclosed on the cover page of various periodic and transactional reports (for example, prospective, 10-K, 10-Q, S-1). An election to follow public company adoption dates is irrevocable. The SEC staff was asked how this aspect of the JOBS Act applies when (a) an EGC has elected to adopt new accounting standards on a deferred basis, (b) a new accounting standard has been issued that applies to both public and nonpublic companies, and (c) the new standard permits early adoption by nonpublic companies. The staff was asked whether, in this situation, an EGC that adopts the new accounting standard before nonpublic companies are required to adopt it would lose its ability to adopt other new accounting standards on a deferred basis. The staff communicated that as long as the new accounting standard permits early adoption by nonpublic companies, an EGC may adopt the standard early without losing the ability to adopt other new standards using nonpublic company effective dates.
• An EGC that elects to present only two years of financial statements in its registration statement is not required to present more than two years of financial statements for a significant acquired business or equity method investee. As a result of the FAST Act, an EGC may also omit financial statements of other entities from its filings or submissions (for example, Rule 3-05 target financial statements) before its completed offering if it reasonably expects that such financial statements will not be required at the time of the offering.
• An EGC need not present its ratio of earnings to fixed charges for more years than presented in the selected financial data table.
• An EGC that is not a shell company and elects to present only two years of financial statements in its registration statement covering an exchange offer or merger is not required to present more than two years of financial statements for the target to be acquired in the merger.
• EGCs are not exempt from the requirement to provide financial information in XBRL format.
• Guidance on how to handle security issuances other than IPOs and EGC eligibility requirements.

The SEC staff guidance also addresses whether a company that became an SEC registrant through a process other than a traditional IPO of equity securities is an EGC and, if so, the effects on its reporting requirements. Such examples include the following:

• Assuming the other definitions are satisfied, as long as the first sale of common equity securities pursuant to an effective registration statement under the Securities Act occurred after December 8, 2011, an issuer qualifies as an EGC. The first sale of common equity securities may include a company’s IPO, an offering pursuant to an employee benefit plan registered on Form S-8, or a selling shareholder’s secondary offering on a resale registration statement.
• Assuming the other definitions are satisfied, a company that has only issued debt securities pursuant to an effective registration statement on or before December 8, 2011, can still qualify as an EGC.
• An EGC can confidentially submit a draft registration statement for review purposes in an exchange offer (generally of debt securities) or merger that constitutes an IPO of its common equity securities.
• An EGC that files a registration statement under the Exchange Act (for example, because it desires to list its securities, or is required to register a class of securities because it has more than $10 million of assets and more than 2,000 shareholders) must provide three years of audited financial statements in its registration statement on Form 20-F or Form 10. Only Securities Act registration statements covering the IPO of common equity securities are eligible to present two years of financial statements. Generally, even though a company filing on Form 10 qualifies as an EGC, there are fewer accommodations available when filing an Exchange Act registration statement (for example, the confidential submission process is not available).
• In an IPO of debt securities, an EGC must present three years of audited financial statements (as the ability to present two years is limited to registered offerings of common equity securities). If, however, an EGC conducts an offering of debt securities subsequent to an IPO of its common equity securities, it does not need to present any period prior to the earliest period presented in the initial registration statement covering the offering of common equity securities.
• An issuer that is a subsidiary or carve-out of an existing registrant can qualify as an EGC as long as the issuer or its parent is not engaging in the transaction solely to take advantage of the benefits available to an EGC.
• An issuer that conducted an IPO of equity securities prior to December 8, 2011, but is no longer required to file Exchange Act reports can qualify as an EGC in its next registered offering. The staff may question circumstances that indicate an issuer has ceased to be a reporting company for the sole purpose of taking advantage of the reporting relief available to emerging growth companies.
• An accelerated filer that is also an EGC is not required to obtain an audit of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. A registrant that, among other things, has a worldwide public equity float of more than $75 million (making it an accelerated filer) but, among other things, has never sold common equity securities pursuant to an effective registration statement under the Securities Act of 1933 (making it an EGC) would fit within these criteria.
• If an EGC became an SEC registrant by filing a registration statement other than a Securities Act registration statement covering an offering of common equity securities (for example, it registered an offering of debt securities or filed an Exchange Act registration statement), it may remain an EGC — indefinitely assuming no disqualifying triggers are met. The fifth anniversary provision does not apply until the first sale of common equity securities pursuant to an effective Securities Act registration statement.

Knowledge check

6. If a company that qualifies as an EGC acquires a significant business, it
   1. Is required to present three years of financial statements for the significant acquired business.
   2. Need not provide financial statements of a significant acquired business.
   3. Is not required to present more than two years of financial statements for the significant acquired business if the EGC elects to present only two years of financial statements in its registration statement.
   4. May omit certain financial statements of the significant acquired business even if they will be required at the time of the offering.
7. Which is not true regarding reporting requirements for an EGC that became a registrant through a nontraditional IPO of equity securities?
   1. An EGC can confidentially submit a draft registration statement for review purposes in an exchange offer or merger that constitutes an IPO of its common equity securities.
   2. An EGC that files a registration statement under the Exchange Act may provide two years of audited financial statements in its registration statement.
   3. If an EGC became an SEC registrant by filing a registration statement other than a Securities Act registration statement covering an offering of common equity securities, it may remain an EGC indefinitely, assuming no disqualifying triggers are met.
   4. An issuer that is a subsidiary or carve-out of an existing registrant can qualify as an EGC as long as the issuer or its parent is not engaging in the transaction solely to take advantage of the benefits available to an EGC.