Chapter 1 — Introduction to Initial Public Offerings

1.6 Emerging Growth Companies

1.6.1 What Are EGCs?

An EGC is a category of issuers that was established in 2012 under the JOBS Act and was granted additional accommodations in 2015 under the FAST Act. The less stringent regulatory and reporting requirements for EGCs are intended to encourage such companies to undertake public offerings. A private company undertaking an IPO will generally qualify as an EGC if it (1) has total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year and (2) has not issued more than $1 billion in nonconvertible debt in the past three years. Once a company completes its IPO, it must meet additional criteria to retain EGC status.

1.6.2 Accommodations Applicable to EGCs

There are many potential benefits for registrants that file an IPO as an EGC. For example, EGCs:

Need only two years of audited financial statements in an IPO of common equity.6
May omit financial information (including audited financial statements) from an IPO registration statement if that financial information is related to periods that are not reasonably expected to be required at the time the registration statement becomes effective.
May elect not to adopt new or revised accounting standards until they become effective for private companies.
Are eligible for reduced executive compensation disclosures.

EGCs are not required to apply the above accommodations and may choose to provide some scaled disclosures but not others. However, if an EGC has elected to opt out of the extended transition period for complying with new or revised accounting standards, this election is irrevocable. Therefore, the registrant, its advisers, and the underwriters should consider which EGC accommodations to use early in the IPO process. The SEC expects EGCs to disclose, in their IPO registration statements, their EGC status and to address related topics, such as the exemptions available to them, risks related to the use of those exemptions, and how and when they may lose EGC status.

Certain scaled disclosure provisions that apply to EGCs may also be available for other entities’ financial statements. For example, financial statements required under SEC Regulation S-X, Rule 3-05 or Rule 3-09, may be omitted from an IPO registration statement if that financial information is related to periods that are not reasonably expected to be required at the time the registration statement becomes effective. In addition, an issuer that was an EGC at the time it initially submitted its IPO registration statement for SEC review but that subsequently ceased to be an EGC is allowed to continue to use the accommodations provided to EGCs until the earlier of either the date it completes its IPO under that registration statement or one year after it ceased to be an EGC.

After its IPO, provided that a registrant retains its EGC status, additional accommodations are available for its ongoing reporting obligations. One of the most significant of these accommodations exempts EGCs from the requirement to obtain, from the entity’s independent registered public accounting firm, an auditor’s report on the entity’s ICFR. EGCs are also exempt, unless the SEC deems it is necessary, from any future PCAOB rules that may require (1) rotation of independent registered public accounting firms or (2) supplements to the auditor’s report, such as communications regarding critical audit matters (CAMs), which are required for certain other issuers.7 See Chapter 7 for further discussion of the ongoing requirements a registrant must comply with after its IPO is effective and the related EGC accommodations.

After going public, a registrant will retain its EGC status until the earliest of:

The last day of the fiscal year in which its total annual gross revenues exceed $1.235 billion.
The date on which it has issued more than $1 billion in nonconvertible debt securities during the previous three years.
The date on which it becomes a large accelerated filer (which is an annual assessment performed on the last day of the fiscal year on the basis of public float as of the end of the second fiscal quarter). To be considered a large accelerated filer, the registrant must have filed at least one annual report and must have been subject to the requirements of Sections 13(a) and 15(d) of the 1934 Act for at least 12 months. Accordingly, the registrant generally cannot be considered a large accelerated filer for its first Form 10-K filing as a public company.
The last day of the fiscal year after the fifth anniversary of the date of the first sale of common equity securities under an effective Securities Act registration statement for an EGC.

Topic 10 of the FRM summarizes many of the SEC staff’s views on EGC-related issues. To further assist registrants, the Division has issued FAQs on numerous aspects of the JOBS Act, many of which address matters related to qualifying for EGC status and the filing requirements for EGCs.

1.6.3 Loss of EGC Status and Impact on Adoption Dates for New Accounting Standards

An EGC may elect to adopt new accounting standards on the basis of effective dates that apply to non-PBEs. However, such an election is available only for as long as the entity qualifies as an EGC. An entity may lose EGC status after the effective date for PBEs but before the effective date for non-PBEs. As discussed in paragraph 10230.1 of the FRM, the SEC staff generally expects an EGC that loses its EGC status to comply with the PBE requirements in the first filing after loss of EGC status. Accordingly, a registrant that loses EGC status before adopting a new standard should reflect such adoption as of the beginning of the current fiscal year. Previously issued financial statements do not need to be amended unless the standard requires full retrospective application. Entities that lose EGC status during the IPO process would reflect adoption of any deferred standards in their first periodic report (i.e., on Form 10-Q or Form 10-K) after the IPO. Entities that lose EGC status after their IPO would reflect adoption of any deferred standards in their next periodic report (i.e., on Form 10-Q or Form 10-K) after the loss of EGC status.

The staff encourages EGCs to (1) review their plans to adopt accounting standards upon the loss of EGC status and (2) consult with the Division if they do not believe that they will be able to comply with the requirement to reflect new accounting standards on a timely basis.

Example 1-1

On December 1, 20X1, Entity A, which qualifies as an EGC, initially submits its IPO registration statement on a confidential basis. On March 1, 20X2, A publicly files its IPO registration statement with financial statements for the year ended December 31, 20X1, and reports more than $1.235 billion in revenue for the year then ended. However, A completes its IPO on May 1, 20X2, and therefore is able to retain EGC status through the completion of the IPO because less than one year has passed since EGC status was lost (i.e., on December 31, 20X1). Nevertheless, A must adopt any accounting standard for which it delayed adoption because of its EGC status. For example, if A delays adoption of the new leasing standard in its registration statement, it would be required to reflect the initial adoption as of January 1, 20X2, in its Form 10-Q for the quarter ended March 31, 20X2.

See Section 18.7 of Deloitte’s Roadmap Leases and Section 9.1.3 of Deloitte’s Roadmap Current Expected Credit Losses for examples illustrating the adoption of ASC 842 and ASC 326 for EGCs and companies that subsequently lose EGC status.

Footnotes

This accommodation is limited to an IPO of common equity. As the SEC clarifies in paragraph 10220.1 of the FRM, an entity will generally need to include three years of audited financial statements when entering into an IPO of debt securities or filing an Exchange Act registration statement, such as a Form 10, to register securities.

CAMs are required for audits of all issuers except (1) brokers and dealers; (2) registered investment companies other than business development companies; (3) employee stock purchase, savings, and similar plans; and (4) EGCs.