No. 2012-07 23 March 2012 To the Point JOBS Act to promote capital formationCongress is trying to What you need to know • The JOBS Act would ease some of the regulatory requirements on companiesboost job creation and seeking access to capital from both the private and public markets.economic growth by • The Act would create a new category of issuer called an emerging growthgiving emerging growth company that would be able to offer stock through an IPO and phase-in certain SEC reporting requirements.companies and private • Private companies would get greater access to funding without triggeringcompanies greater access public reporting requirements. The Act would increase the shareholder threshold for mandatory registration and expand Regulation A offerings upto capital. to $50 million. • The Act would allow private companies to raise money through crowdfunding in certain circumstances. Overview A bill that would give private companies greater access to capital and ease the regulatory requirements for certain companies seeking to go public is close to becoming law. The US House of Representatives, which already approved a version of the bill, is expected to approve a similar bill next week that the US Senate approved on Thursday in a 73 to 26 vote. President Barack Obama is expected to sign the legislation into law shortly thereafter. The legislation, called the Jumpstart Our Business Startups Act (JOBS Act or the Act), would represent a major change in how private companies can access capital through either the private or public markets.
Ernst & Young AccountingLink www.ey.com/us/accountinglink IPO on-ramp for emerging growth companies The Act would create a new category of issuer called an emerging growth company (EGC) to encourage initial public offerings (IPOs). An EGC would be defined as an issuer with annual revenues of less than $1 billion in its most recent fiscal year. A company would be eligible for EGC status for five years after its IPO, but would cease to qualify earlier if it (1) issued more than $1 billion in non-convertible debt in a three-year period, (2) became a large accelerated filer (i.e., market capitalization greater than $700 million) or (3) had annual revenues exceeding $1 billion. The Act would exempt an EGC from the following requirements during the on-ramp period: • Having an independent auditor assess its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. However, an EGC would still have to comply with the Section 404(a) requirement that management assess its internal control over financial reporting, generally beginning with its second annual report on Form 10-K. • Providing more than two years of audited financial statements in its IPO registration statement (i.e., 1933 Act Registration Statement). In post-IPO annual reports, an EGC would need to include the same number of periods as non-EGC issuers (i.e., three years of audited financial statements unless the company is eligible for relief as a smaller reporting company). • Presenting selected financial data in its registration statements or periodic reports for any period before the earliest audited period in its effective IPO registration statement. • Adopting new or revised accounting standards effective for public companies. Effective dates for private companies would apply. • Complying with “say-on-pay” vote requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. An EGC would satisfy executive compensation disclosures in a manner consistent with a smaller reporting company. • Restricting certain communications with accredited investors or qualified institutional buyers before a securities registration and communications between an EGC’s broker dealers and potential investors. • Complying with future changes to PCAOB auditing standards related to mandatory audit firm rotation and an Auditors Discussion & Analysis statement (if adopted). Other new standards would not apply to audits of EGCs unless the SEC decides that they should after considering the protection of investors and whether the action will promote efficiency, competition and capital formation. In a major change from current practice, EGCs would be able to submit IPO registration statements and amendments to the SEC on a confidential basis. The SEC staff would be able to comment and the company would be able to respond before the company files publicly through the EDGAR system. The EGC would be required to publicly file its initial public submission and all amendments no later than 21 days before a road show. How we see it Some companies may accelerate their IPO plans because they would be able to first test the waters regarding their disclosures without publicly disclosing financial information.2 23 March 2012 To the Point JOBS Act to promote capital formation
Ernst & Young AccountingLink www.ey.com/us/accountinglink An issuer that completed its IPO on or after 8 December 2011 could qualify as an EGC, but the JOBS Act would permit any new EGC to forgo an exemption and comply with the requirement of a non-EGC. However, if an EGC elects to comply with the accounting standards of a non-EGC it would have to: • Elect that option when it is first required to file with the SEC • Comply with all updated accounting standards applicable to non-EGCs (i.e., it couldn’t opt in and opt out on an update-by-update basis) How we see it A company that qualifies as an EGC would have to evaluate its likely exit timing and determine whether it should opt in or out. We expect that transition guidance would be needed to help companies weigh their options. Triggers for public registration and reporting The Act, by amending Section 12(g) of the Exchange Act, would increase the number of record holders that trigger a company’s obligation to register and report as a public company to 2,000 people (or 500 people who are not accreditedModifications to investors) from 500 people. For an issuer that is a bank or bank holding company, the trigger would be 2,000 people, even if none are accredited investors. ToSection 12(g) of the provide further relief, the definition of a record holder would be amended to exclude (1) individuals who received the securities through an employee stockExchange Act would allow compensation plan that is exempt from registration and (2) holders of securitiessome companies to avoid issued through permitted crowdfunding (see discussion below).or suspend registration In addition, the Act would raise the threshold below which a bank or bank holding company may terminate registration and suspend its reporting obligation toand reporting as a 1,200 record holders from 300. The threshold of 300 record holders for non-banks and non-bank holding companies would remain unchanged.public company. How we see it The Act would give private companies more flexibility to issue stock to employees as compensation because these shareholders would no longer be counted among record holders who could trigger public registration. Private companies may consider revising employee compensation plans to better align company objectives and compensation. Other Act provisions The Act also includes the following provisions to encourage capital formation: • Companies would be allowed to raise equity capital from a large pool of small investors (e.g., through the internet) through crowdfunding without adding to the record holder count if certain conditions are met, including: • Sales within a 12-month period are limited to $1 million • Financial statements are filed with the SEC, including management certification or independent auditor review or audit based on the size of the offering3 23 March 2012 To the Point JOBS Act to promote capital formation