Topic 10: Emerging Growth Companies
(Last updated: 6/30/2013)
Title I of the JOBS Act, which was effective as of April 5, 2012, created a new category of issuers called “emerging growth companies, or EGCs” whose financial reporting and disclosure requirements in certain areas differ from other categories of issuers. The Fixing America’s Surface Transportation (FAST) Act, enacted on December 4, 2015, amended certain of the requirements that apply to EGCs.
Until the Commission amends the form requirements, Regulation S-X, and Regulation S-K to be consistent with the disclosure provisions for EGCs as set forth in Title I of the JOBS Act (as amended by the FAST Act), an EGC may comply with the disclosure provisions therein in its registration statements, periodic reports, and proxy statements, even if doing so would be inconsistent with existing rules and regulations. The disclosure provisions in Title I supersede, in relevant part, existing rules and regulations. On January 13, 2016, the Commission adopted interim final rules that revised Form S-1 and Form F-1 for certain provisions of the FAST Act.
Refer to the Division of Corporation Finance’s FAST Act guidance at http://www.sec.gov/divisions/corpfin/guidance/fast-act-interps.htm and revised JOBS Act guidance at http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
10110 Eligibility as an EGC
10110.1 An issuer is an EGC if it meets all of the following criteria:
- It had total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year. See Section 10110.2.
- It has either (1) not yet had or (2) had after December 8, 2011, its first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933. See Section 10110.3.
- It has not met any of the disqualifying provisions. See Section 10110.4.
(Last updated: 12/31/2022)
10110.2 Revenue Test: The phrase “total annual gross revenues” means total revenues as presented on the statement of comprehensive income under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer). The term “most recently completed fiscal year” is the most recent annual period completed, regardless of whether the financial statements for the period are presented in the registration statement.
Foreign private issuersIf the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year.
Banks and similar financial institutionsA bank must include all gross revenues from traditional banking activities. Banking activity revenues may include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. (Last updated: 10/30/2020)
PredecessorIf the financial statements for the most recently completed fiscal year are those of the predecessor of the issuer, the predecessor’s revenues should be used when determining if the issuer meets the definition of an EGC.
10110.3 First sale of common equity securities: This phrase is not limited to a company’s initial primary offering of common equity securities for cash. It could also include registered offerings of common equity pursuant to an exchange offer, merger, employee benefit plan on a Form S-8, and selling shareholder’s secondary offering on resale registration statements.
10110.4 Disqualifying Provisions
An issuer retains its status as an EGC until the earliest of:
- The last day of the fiscal year in which its total annual gross revenues are $1.235 billion or more. For example, a calendar year-end company whose total annual gross revenues exceed $1.235 billion on October 31, 2013 would cease to be an EGC on December 31, 2013. (Last updated: 12/31/2022)
- The last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities of the issuer under an effective Securities Act registration statement as an EGC.
- This date is determined by looking to the fiscal year during which the fifth anniversary occurs. The last day of this fiscal year will be the first day that the issuer is a non-EGC, provided no other disqualifying provisions have been triggered at an earlier date.
- The date on which it has issued more than $1 billion in non-convertible debt in the previous three years.
- “Non-convertible debt” means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not. Bank debt generally does not constitute a debt security.
- For purposes of assessing the amount of non-convertible debt securities issued as of any date, an issuer should look at the immediately preceding rolling three-year period. An issuer does not look at non-convertible debt issued in relation to fiscal or calendar years.
- All non-convertible debt securities issued over the prior three-year period, whether outstanding or not, are required to be counted against the $1 billion debt limit. A company does not have to count debt securities issued in an A/B exchange offer. These debt securities are identical to (other than the fact that they are not restricted securities) and replace those issued in the non-public offering and the staff views the A/B exchange offer as, in effect, the completion of the capital-raising transaction.
- The date on which it becomes a large accelerated filer. Note: the determination of whether a company is a large accelerated filer is made on the last day of the company’s fiscal year. See Section 1340.2.
10110.5 Losing Eligibility Prior to Effectiveness — If a company was an EGC at the time it submitted a draft registration statement or publicly filed a registration statement, but ceases to qualify as an EGC while undergoing the confidential review of its draft registration statement or the review of its publicly filed registration statement — for example, since the initial submission or filing date, a fiscal year has been completed with revenues over $1.235 billion — the company will continue to be treated as an EGC for the purposes of disclosure requirement accommodations in its initial registration statement until the earlier of:
- The date on which the issuer consummates its initial public offering, or
- The end of the one-year period beginning on the date the company ceased to be an EGC.
(Last updated 7/1/2019)
10110.6 Losing Eligibility Between Initial Filing Date and Effectiveness — Securities Act Rule 401(a) provides that the “form and content of a registration statement and prospectus shall conform to the applicable rules and forms as in effect on the initial filing date of such registration statement and prospectus.” Accordingly, the ability to use in a registration statement the scaled disclosure provisions applicable to EGCs depends on whether the company qualifies as an EGC at the initial public filing date of the registration statement. If a company qualifies as an EGC on the initial date that it publicly files a registration statement, the scaled disclosure provisions related to EGCs would continue to apply through effectiveness of the registration statement even if the issuer loses its EGC status during the registration process.
10110.7 Losing Eligibility After First Sale — If an issuer loses its EGC status after it has conducted its first sale of common equity securities pursuant to an effective registration statement as an EGC, it cannot regain EGC status.
10110.8 Effect of Prior Exchange Act Reporting Obligation that No Longer Exists — If an issuer would otherwise qualify as an EGC but for the fact that its initial public offering of common equity securities occurred on or before December 8, 2011, and such issuer was once an Exchange Act reporting company but is not currently required to file Exchange Act reports, then the staff would not object if such issuer takes advantage of all of the benefits of EGC status for its next registered offering and thereafter, until it triggers one of the disqualifying provisions. This position is not available to an issuer that has had the registration of a class of its securities revoked pursuant to Exchange Act Section 12(j).
Based on the particular facts and circumstances, the staff may question EGC status of an issuer if it appears that the issuer ceased to be a reporting company for the purpose of conducting a registered offering as an EGC. Issuers with questions relating to taking advantage of the benefits of EGC status after ceasing to be an Exchange Act reporting company should contact the Division’s Office of the Chief Counsel.
10110.9 Effect of Predecessor Ineligibility on Successor — If an issuer completes a transaction through which it becomes the successor to its predecessor’s Exchange Act registration and reporting obligations and the predecessor is not eligible to be an EGC because its first sale of common equity securities occurred on or before December 8, 2011, then similarly the issuer (successor) is not eligible to be an EGC.
10120 Other Eligibility Issues
10120.1Transactions Related to a Subsidiary of the Registrant — A parent may: (1) spin-off a wholly-owned subsidiary, (2) register an offer and sale of the wholly owned subsidiary’s common stock for an initial public offering, or (3) transfer a business into a newly-formed subsidiary for purposes of an initial public offering of that subsidiary’s common stock. In these circumstances, the analysis to determine whether an issuer is an EGC focuses on whether the subsidiary, and not the parent, meets the requirements of an EGC. See also Section 10120.3.
10120.2 Assessing Eligibility Subsequent to a Merger Transaction — Eligibility as an EGC will vary subsequent to a merger transaction.
Example 1: Company A acquires Company B for cash or stock, in a forward acquisition. Company A is both the legal acquirer and the accounting acquirer.
Example 2: Company C undertakes a reverse merger with Company D, an operating company. Company D is presented as the predecessor in the post-transaction financial statements.
In each example, the companies’ fiscal year is the calendar year; the transactions occur on September 30, 2012; and Section 10110.9 on succession does not apply.
The evaluation of Company’s A’s and Company’s C’s eligibility as an EGC post-transaction, should be considered as follows. See also Section 10120.3.
Example 1: Forward Acquisition
Example 2: Reverse Merger
Annual revenues test
Look to Company A’s revenues, which will include Company B’s revenues from Oct. 1, 2012.
Look to Company D’s revenues, which will include Company C’s revenues from Oct. 1, 2012.
Five-year anniversary test
Look to Company A’s date of first sale.
Look to Company C’s date of first sale.
Issued debt during previous three years test
Look to Company A’s debt issuances, which will include Company B’s debt issuances from Oct. 1, 2012.
Look to Company D’s debt issuances, which will include Company C’s debt issuances from Oct. 1, 2012.
Large accelerated filer test
At Dec. 31, 2012, look to Company A’s market value at June 30, 2012.
At Dec. 31, 2013, look to Company A’s market value (which will include Company B’s) at June 30, 2013.
At Dec. 31, 2012, look to Company C’s market value at June 30, 2012.
At Dec. 31, 2013, look to Company C’s market value (which will include Company D’s) at June 30, 2013.
The above table should be considered in conjunction with Section 10110.9.
For example, assume a shell company files its initial public offering of common equity securities on or before December 8, 2011 and thus, is not an EGC. Two years later, it undertakes a reverse merger with another company that qualifies as an EGC. Post-transaction, notwithstanding the above table, the registrant is not an EGC and may not take advantage of any scaled disclosure provisions.
10120.3 Disallowing Emerging Growth Company Status — Based on the particular facts and circumstances, the staff may question EGC status of a company if it appears the company is engaging in a transaction for the purpose of converting a non-EGC into an EGC, or for the purpose of obtaining the benefits of EGC status indirectly when it is not entitled to do so directly.
10200 Scaled Disclosure Provisions
10210.1 An EGC is not required to apply all scaled disclosures; it may choose to follow some scaled disclosures, but not others. However there is one exception related to accounting standards, which is discussed in Section 10230.1b.
10220 Financial Reporting Accommodations
10220.1 Number of Years of Registrant Financial Statements to be Presented
- Initial Public Offering of Common Equity SecuritiesAn EGC is not required to present more than two years of audited financial statements in a Securities Act registration statement for an initial public offering of its common equity securities.Foreign private issuers that file using IFRS as issued by the IASB may need a third balance sheet in certain circumstances. See Section 10320.
- Initial Public Offering of Debt SecuritiesAn EGC must present three years of audited financial statements in its initial public offering of debt securities, unless Section 10220.1c applies.
- Securities Act Registration Statements Filed Subsequent to the Initial Public Offering of Common Equity SecuritiesAn EGC is not required, in subsequent filings, to include audited financial statements for any periods prior to the earliest audited period presented in connection with its initial public offering of common equity securities.
- Exchange Act Registration StatementsEGC Exchange Act registration statements require the presentation of three years of financial statements unless the company qualifies as a smaller reporting company.
- Annual Report on Form 10-K or 20-FFor an EGC 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.
- Omission of Financial Information for Historical PeriodsSee the Division of Corporation Finance’s C&DIs for Securities Act Forms, Question 101.04. Note that Question 101.05 addresses similar matters for non-EGC issuers. (Last updated 8/25/2017)
10220.2 Selected Financial Data
In the initial registration statement under the Securities Act or the Exchange Act and in subsequent filings, an EGC is not required to present selected financial data in accordance with Item 301 of Regulation S-K for any period prior to the earliest audited period presented in that initial registration statement.
A company that has lost EGC status does not need to present, in subsequently filed registration statements and periodic reports, selected financial data for periods prior to the earliest audited period presented in its initial Securities Act or Exchange Act registration statement.
(Last updated: 10/30/2020)
10220.4 Management Discussion and Analysis
(Last updated: 3/17/2016)
An EGC may limit its MD&A discussion to cover the periods presented in the financial statements included in its registration statements filed or submitted for its initial public offering.
10220.5 Financial Statements of Entities Other Than the Registrant and Pro Forma Financial Information
(Last updated: 11/9/2016)
- If the significance tests result in a requirement to present three years of financial statements for entities other than the registrant, such as acquired businesses under Rule 3-05, acquired real estate operations under Rule 3-14 or equity method investees under Rule 3-09, an operating company EGC may present two years of financial statements for these other entities in the registration statement for its initial public offering of common equity securities.
- If an operating company EGC voluntarily presents a third year of its financial statements in its initial public offering of common equity securities, it may limit the financial statements of these other entities to two years instead of three in that registration statement.
- See the Division of Corporation Finance’s C&DIs for the FAST Act, Question 2 for guidance regarding the omission of financial statements of other entities. (Last updated 8/25/2017)
- An EGC may be required to file a Form 8-K pursuant to Items 2.01 and 9.01 for the acquisition of a significant business. If the significance tests result in a requirement to present three years of financial statements, an operating company EGC may present two years of financial statements for the acquired business in its Form 8-K during the period subsequent to the EGC’s initial public offering of common equity securities, but prior to the earlier of the filing or the filing deadline of its first Form 10-K.For example, assume a non-SRC operating company that qualifies as an EGC presents two years of its financial statements in the registration statement for its initial public offering of common equity securities. Two years later, it acquires a company that also qualifies as a non-SRC EGC. Assume that post-transaction, based on the application of Section 10120.2, the post-merger company is an EGC. Post-transaction, the Form 8-K must present three years of the accounting acquirer’s financial statements, even though the post-merger company is an EGC. The reason is that the Form 8-K is not: (1) a registration statement for an initial public offering of common equity securities or (2) filed subsequent to the EGC’s registration statement for an initial public offering of common equity securities, but prior to the earlier of the filing or the filing deadline of its first Form 10-K. However, because the post-merger company is an EGC, it may take advantage of scaled disclosure provisions other than those related to the number of years to present in a filing.
10220.6 Financial Statements of a Target Company in Form S-4
The staff will not object if an operating company EGC presents two years of the target’s financial statements and interims in a Form S-4 that constitutes an EGC’s initial public offering of common equity securities or in a Form S-4 filed subsequent to the EGC’s initial public offering of common equity securities but prior to the earlier of the filing or the filing deadline of its first Form 10-K.
See related discussion in Section 2200.1 to 2200.5 for the periods for which target financial statements need to be presented in a Form S-4 and Sections 2200.6 and 2200.7 for when target financial statements need to be audited in an S-4.
10220.7 Financial Statements of a Target Company in a Proxy Statement
(Last updated: 11/9/2016)
To the extent that target financial statements are required in a proxy statement (see Section 1140.3), the staff will not object if two years of the target’s annual financial statements and interim financial statements are presented in a proxy statement filed after the legal acquirer’s initial public offering of common equity securities but prior to the filing or the filing deadline of the legal acquirer’s first Form 10-K only if:
The legal acquirer is an EGC that is not a shell company, or
The legal acquirer is a shell company EGC (such as a SPAC EGC) and the target would be an EGC if it were conducting an initial public offering of common equity securities.
10230 Accounting Standards Transition Period Accommodation
10230.1 An EGC may elect to defer compliance with new or revised financial accounting standards until a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002) is required to comply with such standards, if such standards apply to companies that are not issuers. The term new or revised financial accounting standards refers to any update issued by the FASB to its Accounting Standards Codification after April 5, 2012, the date of the enactment of the JOBS Act. See Section 10300 for companies filing under IFRS as issued by the IASB.
- An EGC must make such choice at the time the company is first required to file a registration statement, periodic report, or other report and must notify the Commission of such choice.
- An issuer must comply with the transition provisions for all new or revised accounting standards in the same manner. In other words, it may not apply some new and revised financial accounting standards at the same date a non- EGC is required to comply, but defer the adoption of other standards.
- An EGC may choose not to take advantage of the “extended transition period” exemptions for EGCs and instead comply with the requirements that apply to an issuer that is not an EGC. Any decision to forego the extended transition period for complying with new or revised accounting standards is irrevocable.
- If an EGC chooses to take advantage of the extended transition period, the company can later decide otherwise (i.e., “opt in” by complying with the financial accounting standard effective dates applicable to non-EGCs), so long as it complies with the requirements in Sections 107(b)(2) and (3) of the JOBS Act, which state that an EGC may not select some standards to comply with and not others, and must continue to comply with such standards to the same extent as a non-EGC is required to comply for as long as the company remains an EGC. This decision should be disclosed in the first periodic report or registration statement following the company’s decision and is irrevocable.
- An EGC that has elected to take advantage of the extended transition period provision may early adopt a new or revised accounting standard if permitted by the standard, without being deemed to have “opted in” for purposes of subsequent new or revised financial accounting standards.
- EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the staff any issues they foresee in being able to timely comply. Generally, if an EGC loses its status after it would have had to adopt a standard absent the extended transition, the issuer should adopt the standard in its next filing after losing status. However, depending on the facts and circumstances, the staff may not object to other alternatives. (Last updated: 12/1/2017)
10230.2 Nonpublic entities are specifically excluded from the scope of certain financial accounting standards. The provisions regarding the extended transition periods available to EGCs do not exempt EGCs from compliance with accounting standards applicable to public entities. Rather, EGCs, like non-EGCs, must evaluate the scope of each financial accounting standard.
10230.3 SAB Topic 11M provides disclosure guidance with respect to recently issued accounting standards that will be adopted by the registrant in a future period. SAB Topic 11M specifies that one of the disclosures that should generally be considered by a registrant is the effective date of such standards. For each recently issued accounting standard that will apply to its financial statements, an EGC that chooses to take advantage of the extended transition periods should disclose the date on which adoption is required for non-EGCs and the date on which the EGC will adopt the recently issued accounting standard, assuming it remains an EGC as of such date.
10240 Internal Control Over Financial Reporting [SOX 404] Accommodation
10240.1 Section 103 of the JOBS Act provides that an EGC is not required to comply with the requirement to provide an auditor’s report on ICFR under Section 404(b) of the Sarbanes-Oxley Act for as long as it qualifies as an EGC.
10240.2 An EGC is not exempt from the requirement to perform management’s assessment of internal control over financial reporting (SOX 404(a) and the disclosure requirement of Item 308(a) of Regulation S-K). For EGCs that are newly public companies, see Section 4310.6.
10300 Foreign Private Issuers
10310.1 A foreign private issuer that qualifies as an EGC may comply with the scaled disclosure provisions available to EGCs to the extent relevant to the form requirements for foreign private issuers.
10310.2 A foreign private issuer that qualifies as an EGC and reconciles its home country GAAP financial statements to U.S. GAAP may take advantage of the extended transition period discussed in Section 10230 for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation.
10310.3 EGCs that are foreign private issuers may not report under IFRS for Small and Medium-sized Entities or a separate set of local GAAP standards for nonpublic entities.
10320 Number of Years of Registrant Financial Statements to be Presented under IFRS
10320.1 First Time Adoption of IFRS as Issued by the IASB — Paragraphs 6 and 21 of IFRS 1, First-time Adoption of International Financial Reporting Standards, require a first-time adopter of IFRS to present an opening IFRS statement of financial position at the date of transition to IFRS. In order for a first-time adopter to assert that its financial statements are prepared in accordance with IFRS as issued by the IASB, it must include three statements of financial position, even if the first-time adopter is an EGC.
10320.2 Retrospective Changes and Reclassifications under IFRS as Issued by the IASB — A foreign private issuer that is not a first-time adopter of IFRS is required by paragraph 10(f) of IAS 1, Presentation of Financial Statements, to provide three statements of financial position when it applies an accounting policy retrospectively, makes a retrospective restatement, or reclassifies items in its financial statements. In order to assert that its financial statements are prepared in compliance with IFRS as issued by the IASB, a foreign private issuer must include three statements of financial position, even if it is an EGC.
10330 Multi-Jurisdictional Disclosure System (“MJDS”)
10330.1 A Canadian issuer filing under MJDS may qualify as an EGC. While the disclosure requirements for the Canadian issuer would continue to be established under its home country standards in accordance with the MJDS, other provisions of Title I, such as the deferral of compliance with Section 404(b) of the Sarbanes-Oxley Act, would be available to an MJDS filer that qualifies as an EGC.