Accounting and Auditing Implications of the JOBS Act

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Outline: Overview of the JOBS Act; Public emerging growth companies; private offerings; remaining private; Crowdfunding.

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Accounting and Auditing Implications of the JOBS Act

  1. 1. Accounting and Auditing Implications of theJOBS ActSeptember 21, 2012Greg Pfahl, CPA
  2. 2. Outline• Overview of the JOBS Act• Public Emerging Growth Companies• Private Offerings• Remaining Private• Crowdfunding © 2011 Hein & Associates, LLP. All rights reserved.
  3. 3. Overview of the Act• Signed April 5, 2012• Jumpstart our Business Startups (JOBS) Act• “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.” © 2011 Hein & Associates, LLP. All rights reserved.
  4. 4. Overview of the Act• Intended to: – Ease the IPO process and create an “IPO on-ramp” – Improve access to capital through private and small public offerings without SEC registration – Allow private companies with a relatively large number of shareholders to delay becoming a public company © 2011 Hein & Associates, LLP. All rights reserved.
  5. 5. Overview of the Act• Title I – Emerging Growth Companies• Title II – Access to Capital• Title III – Crowdfunding• Title IV – Small Company Capital Formation• Title V – Private Company Flexibility• Title VI – Capital Expansion © 2011 Hein & Associates, LLP. All rights reserved.
  6. 6. Other Material• Limited SEC guidance• SEC Frequently Asked Questions and other information located on their website – www.sec.gov/spotlight/jobs-act.shtml © 2011 Hein & Associates, LLP. All rights reserved.
  7. 7. Emerging Growth Companies• First registered sale of common stock after December 8, 2011• Annual gross revenue less than $1 billion during most recently completed fiscal year © 2011 Hein & Associates, LLP. All rights reserved.
  8. 8. Emerging Growth Companies• Duration of EGC status – Emerging Growth Company continues to be an EGC until the earlier of: • The last day of the fiscal year of the issuer during which it had annual gross revenues of $1 billion or more (indexed for inflation every five years) • The last day of the fiscal year following the 5th anniversary of the 1st registered sale of common stock • The date on which the issuer has issued more than $1 billion in non- convertible debt over the previous three year period • The date on which such issuer is deemed to be a large accelerated filer as defined in Regulation12b-2 © 2011 Hein & Associates, LLP. All rights reserved.
  9. 9. Emerging Growth Companies• Regulation 12b-2 – Large accelerated filer: • Issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter • Issuer has been subject to the requirement of section 13(a) or 15(d) for a period of at least 12 calendar months • Issuer has filed at least one annual report pursuant to section 13(a) or 15(d) • Issuer is not eligible to use the requirements for smaller reporting companies in Part 229 for its annual and quarterly reports © 2011 Hein & Associates, LLP. All rights reserved.
  10. 10. Emerging Growth Companies• EGC Status not available in case of succession – SEC Q&A 24 – An issuer completes a transaction that results in the issuer becoming the successor to its predecessor’s Exchange Act registration and reporting obligations pursuant to Exchange Act Rules 12g-3 and 15d-5, which occurs automatically. If the predecessor was not eligible to be an emerging growth company because its first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011, can its successor nevertheless qualify as an emerging growth company? – SEC Answer – No © 2011 Hein & Associates, LLP. All rights reserved.
  11. 11. Emerging Growth Companies• Once an issuer loses EGC status, there is no reentry © 2011 Hein & Associates, LLP. All rights reserved.
  12. 12. Emerging Growth Companies• Implications – Internal control over financial reporting – Exemption from future PCAOB standards – Periods presented in registration – Adoption of new accounting pronouncements – Other disclosures – Confidential submissions © 2011 Hein & Associates, LLP. All rights reserved.
  13. 13. Emerging Growth Companies• Implications – Exemption from SOX 404b – 404b requires an external auditor attestation on the issuer’s internal control over financial reporting – Management’s assessment of internal control over financial reporting is still required – The Dodd-Frank Wall Street Reform and Consumer Protection Act permanently exempted companies that are not accelerated or large accelerated filers from 404b – Item 308 of Regulation S-K contains requirements for auditor attestation © 2011 Hein & Associates, LLP. All rights reserved.
  14. 14. Emerging Growth Companies• Implications – Exemption from 404b (continued) – Regulation 12b-2 Definition of Accelerated Filer • Issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the issuer’s most recently completed second fiscal quarter • Issuer has been subject to the requirement of section 13(a) or 15(d) for a period of at least 12 calendar months • Issuer has filed at least one annual report pursuant to section 13(a) or 15(d) • Issuer is not eligible to use the requirements for smaller reporting companies in Part 229 for its annual and quarterly reports © 2011 Hein & Associates, LLP. All rights reserved.
  15. 15. Emerging Growth Companies• Implications – Exemption from 404b (continued) – How does this change prior rules? • Instructions to Item 308 (Regulation S-K) • A registrant need not comply with paragraphs (a) and (b) of this Item until it either had been required to file an annual report pursuant to section 13(a) or 15(d) of the Exchange Act for the prior fiscal year or had filed an annual report with the Commission for the prior fiscal year. A registrant that does not comply shall include a statement in the first annual report that it files in substantially the following form: “This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.” © 2011 Hein & Associates, LLP. All rights reserved.
  16. 16. Emerging Growth Companies• Implications – Future PCAOB standards • Mandatory audit firm rotation • Auditor discussion and analysis • Other future standards © 2011 Hein & Associates, LLP. All rights reserved.
  17. 17. Emerging Growth Companies• Implications – Periods presented in initial registration statements • Audited Financial Statements – Rule 3-02 currently requires audited statements of income and cash flows for the three most recently completed fiscal years – Changed to no more than two years • Selected Financial Data – Need not present selected financial data for any period prior to the earliest audited period presented in connection with its initial public offering • Management Discussion and Analysis – Need only provide the same periods as financial statements presented elsewhere in the registration statement © 2011 Hein & Associates, LLP. All rights reserved.
  18. 18. Emerging Growth Companies• Implications – Periods Presented in Initial Registration Statements (continued) – SEC Q&A 30: – How many years of audited financial statements are required to be included in an emerging growth company’s Form 10-K or Form 20-F? – Answer: For an emerging growth company that is not a smaller reporting company, three years of audited financial statements are required to be included in its Form 10-K or Form 20-F. The provision in Securities Act Section 7(a)(2)(A) permitting emerging growth companies to file only two years of audited financial statements is limited to the registration statement for the emerging growth company’s initial public offering of common equity securities. We note that, as a practical matter, an emerging growth company will not be required to include, in its first annual report on Form 10-K or on Form 20-F, audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities. For example, if an emerging growth company with a December 31 fiscal year- end has a registration statement for its initial public offering of common equity securities declared effective during the 3rd quarter of 2012, the registration statement would include audited financial statements for 2011 and 2010. The registrant’s first annual report, which will be for the fiscal year ending December 31, 2012 and will be filed in 2013, will include audited financial statements covering 2012, 2011 and 2010. © 2011 Hein & Associates, LLP. All rights reserved.
  19. 19. Emerging Growth Companies• Implications – Adoption of new accounting pronouncements • Option to transition as private company • Must formally make election with SEC at the time the EGC is first required to file a registration statement, periodic report or other report with the SEC • Opt-out is irrevocable © 2011 Hein & Associates, LLP. All rights reserved.
  20. 20. Emerging Growth Companies• Implications – Adoption of new accounting pronouncements (continued) • SEC Q&A 13 • If an emerging growth company chooses not to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards, when is the emerging growth company required to make that decision, and how should that be communicated to the Commission? • Answer: Section 107(b)(1) of the JOBS Act provides that an emerging growth company “must make such choice at the time the company is first required to file a registration statement, periodic report, or other report with the Commission” and to notify the Commission of such choice. Although emerging growth companies that are submitting their draft registration statements on a confidential basis will not be required to file a registration statement until at least 21 days before the road show, they should notify the review staff of their choice in their initial confidential submission, as that choice will inform the staff’s review of the financial statements in the draft registration statement. Emerging growth companies that currently are in registration or are subject to Exchange Act reporting should make and disclose their choice in their next amendment to the registration statement or in their next periodic report, respectively. • Note that Section 107(b)(2) provides that any decision to opt out of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards is irrevocable. © 2011 Hein & Associates, LLP. All rights reserved.
  21. 21. Emerging Growth Companies• Implications – Adoption of new accounting pronouncements (continued) • SEC Q&A 37 • If an emerging growth company chooses to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards, can it later decide to “opt in” (i.e., comply with the financial accounting standard effective dates applicable to non-emerging growth companies)? • Answer: Yes. If an emerging growth company initially decides to take advantage of the extended transition period provided in Section 7(a)(2)(B), we will not object if the company later decides to opt in, so long as it complies with the requirements in Sections 107(b)(2) and (3) of the JOBS Act. This decision should be prominently disclosed in the first periodic report or registration statement following the company’s decision and is irrevocable. © 2011 Hein & Associates, LLP. All rights reserved.
  22. 22. Emerging Growth Companies• Implications – Other disclosures • Executive compensation disclosures – Not required to provide a Compensation Discussion and Analysis – Provide information on three named executive officers, as opposed to five – Executive compensation data reduced from three years to two years – The following tables are eliminated for EGC’s » Grants of Plan-Based Awards » Option Exercises and Stock Vested » Pension Benefits » Nonqualified Deferred Compensation – Permitted to eliminate narrative disclosure of compensation policies and practices related to risk management © 2011 Hein & Associates, LLP. All rights reserved.
  23. 23. Emerging Growth Companies• Implications – Other disclosures (continued) • Say on Pay and Golden Parachutes – EGC’s are exempt from vote requirements • Following disclosure requirements removed: – Relationship between executive compensation and financial performance – Executive compensation ratio comparing median of annual total compensation of all employees to the total compensation of the chief executive officer © 2011 Hein & Associates, LLP. All rights reserved.
  24. 24. Emerging Growth Companies• Implications – Confidential submissions • Initial registration statements may be submitted confidentially • Includes comment letters and responses • Must be filed publicly no later than 21 days prior to roadshow • EGC should disclose that it is an EGC on cover page of prospectus © 2011 Hein & Associates, LLP. All rights reserved.
  25. 25. Private Offerings• Regulation A Offerings – Increased threshold to $50 million – Previously $5 million © 2011 Hein & Associates, LLP. All rights reserved.
  26. 26. Private Offerings• Other Changes – Annual audited financial statements – Electronic offering circular – Periodic disclosure requirements – Potential exemption from Blue Sky Laws• These changes under Title IV of the JOBS Act are not immediately effective and no deadline was set for the SEC © 2011 Hein & Associates, LLP. All rights reserved.
  27. 27. Private Offerings• General Solicitation and Advertising – Revision of Rule 506 of Regulation D to allow general solicitation and advertising • Securities are only purchased by accredited investors • Reasonable steps by issuer are taken to verify that investors are accredited• 90 Days to revise rules © 2011 Hein & Associates, LLP. All rights reserved.
  28. 28. Private Company Flexibility and Growth• Section 12(g) of the 1934 Act – A company with $10 million in assets must register any class of security that is held by 500 or more shareholders of record as of the end of its fiscal year• Shareholders of Record Increased from 500 to 2,000 – Less than 500 non-accredited investors• Definition of “Held of Record” excludes certain employee shares © 2011 Hein & Associates, LLP. All rights reserved.
  29. 29. Crowdfunding• Prominent posting on SEC website:• “…The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.” © 2011 Hein & Associates, LLP. All rights reserved.
  30. 30. Crowdfunding• What is “Crowdfunding?” – “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012” © 2011 Hein & Associates, LLP. All rights reserved.
  31. 31. Crowdfunding• Exempt from registration• Limitations: – Issuer • Up to $1 million in any 12 month period – Investor • Greater of $2,000 or 5% of annual income if annual income or net worth is less than $100,000; or • 10% of annual income or net worth up to maximum $100,000 if either annual income or net worth is equal to or more than $100,000 © 2011 Hein & Associates, LLP. All rights reserved.
  32. 32. Crowdfunding• Transactions conducted through broker or online funding portal• Issuer must file with the SEC – Financial Statement Thresholds • $100,000 or less – Income tax returns filed for the most recently completed fiscal year – Financial statements certified by the principal executive officer • $100,000 to $500,000 – Financial statements reviewed by an independent public accountant • Greater than $500,000 – Audited financial statements – Annual financial statements as determined by rule of the SEC © 2011 Hein & Associates, LLP. All rights reserved.
  33. 33. Crowdfunding• Securities are restricted• 270 days for SEC rulemaking © 2011 Hein & Associates, LLP. All rights reserved.
  34. 34. 7 Stages of the Business Lifecycle Seed Exit Start-Up Decline Growth Expansion Established © 2011 Hein & Associates, LLP. All rights reserved.
  35. 35. Accounting and Auditing Implications of the JOBS Act• Conclusions and questions Hein & Associates LLP Greg Pfahl, Partner 303-298-9600 gpfahl@heincpa.com © 2011 Hein & Associates, LLP. All rights reserved.

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