3.8 Emerging Growth Companies

An EGC is a category of issuer that was established in 2012 under the JOBS Act and was granted additional accommodations in 2015 under the FAST Act to encourage public offerings by small and developing companies. 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 of nonconvertible debt over the past three years. Once a company completes its IPO, it must meet additional criteria to retain EGC status. The regulatory and reporting requirements for EGCs are less stringent than those for other types of issuers. For example, EGCs:

Need only two years of audited financial statements in an IPO of common equity.30
May elect not to adopt new or revised accounting standards until they become effective for private companies (i.e., nonissuers).
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.31
Are exempt from the requirement to obtain an attestation report on ICFR from their auditor.
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.

If an EGC elects to submit its IPO registration statement to the SEC on a confidential basis, the submission and related comment letters and responses will not immediately be posted on EDGAR. However, a “public” filing of the IPO registration statement must be made at least 15 days before the EGC’s “road show,” after which any confidential draft registration statements, along with related comment letters and responses, will also be publicly released by the SEC staff on EDGAR.

Unless the SEC deems otherwise in specific cases, EGCs are also exempt 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, that are required for certain other issuers.

Certain scaled disclosure provisions that apply to EGCs are also applicable to other SEC rules. For example, the accommodations listed above can typically also be applied to the requirement to include any other entity’s financial statements required under Regulation S-X, Rules 3-05 and 3-09.

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 filing date as of 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).
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.

The staff in the Division has issued FAQs on numerous aspects of the JOBS Act, many of which are related to qualifying for EGC status and the filing requirements for EGCs. In addition, the SEC staff provides EGC-related guidance in Topic 10 of the FRM.

In its comment letters to EGCs, the SEC staff primarily has asked companies to disclose (1) that they qualify for EGC status, (2) how and when they may lose their EGC status, (3) the elections they made under Title I of the JOBS Act, and (4) their qualification for an exemption from Section 404(b) of the Sarbanes-Oxley Act.

3.8.1 EGC Status and Elections

Examples of SEC Comments

You state that you are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act. Please revise your prospectus to address the following:
- Describe how and when a company may lose emerging growth company status;
- Briefly describe the various exemptions that are available to you, such as exemptions from Section [404(b)] of the Sarbanes-Oxley Act of 2002 and Section 14(a) and (b) of the Securities Act of 1934; and
- State your election under Section 107 (b) of the JOBS Act. If you elect to use the extended transition period for complying with new or revised accounting standards, state that as a result of this election, your financial statements may not be comparable to companies that comply with public company effective dates. If you have elected to opt out of the extended transition period, include a statement that the election is irrevocable.
Given your stated intention to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, please disclose the date on which you will adopt the standard(s) disclosed, assuming you will remain an EGC at such time. Refer to Question 14 of the Jumpstart Our Business Startups Act Frequently Asked Questions.
We note that you have indicated on the cover page that you are an emerging growth company and have elected not to use the extended transition period for complying with new or revised financial accounting standards; and that this is consistent with similar indications in prior periodic reports and your registration statement.

Please update your risk factor disclosure . . . , concerning your status as an emerging growth company, indicating that you “may take advantage of certain exemptions from various reporting and regulatory requirements that are applicable to other public companies,” as necessary to reflect your election in this regard.
Pursuant to the requirements for documentation of internal controls under the Sarbanes-Oxley Act of 2002 (“SOX”), please ensure you include a statement in future filings on Form 10-K that . . . an accounting firm is not required to attest to internal controls of the Company under Section 404(b) of SOX because the Company is an Emerging Growth Company (“EGC”). The Company must nonetheless establish and maintain internal controls and provide reports on their effectiveness, as required by Section 404(a) of SOX.

3.8.1.1 Filing Status

Because a key objective of the JOBS Act is to promote smaller companies’ access to capital markets, some of the JOBS Act’s accommodations for EGCs resemble reporting requirements for SRCs (e.g., annual financial statement requirements in an IPO registration statement under Regulation S-X, Article 8). However, the rules are not the same, and the SEC staff has asked EGC filers to clarify descriptions of their filing status. Further, a company can maintain EGC status for up to a maximum of five years after an equity IPO as long as certain conditions apply.32 The SEC staff has asked EGC filers to disclose information about their filing status, including how and when the company may lose EGC status.

3.8.1.2 Extended Transition Period to Adopt New or Revised Accounting Standards

EGCs are not required to adopt new or revised accounting standards as of the effective dates for public entities (if nonpublic entities have a delayed effective date). The SEC staff has asked EGC filers to indicate the basis on which they are adopting accounting standards by checking off (or leaving blank) the checkbox on the cover page of the filing. Further, the staff has asked EGCs that elect to adopt accounting standards on the basis of adoption and transition dates that apply to private companies to disclose as a risk factor that their financial statements may not be comparable with those of registrants that elect (or are required) to adopt accounting standards on the basis of adoption and transition dates that apply to public companies. In addition, such risk factor disclosures should be consistent with the EGC’s election status for adopting new or revised accounting standards. The staff has also asked registrants to include similar disclosures in their critical accounting policy section of MD&A.

Further, the SEC staff has addressed transition requirements related to the adoption of new accounting standards for EGCs that elect to take advantage of the extended transition provisions and defer adoption of a new or revised accounting standard by using private-company adoption dates. For more information, see Section 1.6.3 of Deloitte’s Roadmap Initial Public Offerings.

3.8.1.3 Section 404(b) Exemption

The JOBS Act amends Section 404(b) of the Sarbanes-Oxley Act by exempting EGCs from the requirement to obtain an attestation report on the company’s ICFR from its registered public accounting firm. The SEC staff has required registrants to disclose that they are exempt from obtaining an audit of their ICFR (for as long as they maintain EGC status). However, EGCs are not exempt from the requirement that management perform an assessment of ICFR in accordance with Section 404(a) of the Sarbanes-Oxley Act.

3.8.2 Other Considerations

3.8.2.1 Requests for Written Communications

Example of an SEC Comment

Provide us copies of all written communications as defined in Rule 405 under the Securities Act that you or anyone authorized on your behalf present to potential investors in reliance on Section 5(d) of the Securities Act, whether or not they retain copies of the communications. Similarly, provide us any research reports about you that are published or distributed in reliance upon Section 2(a)(3) of the Securities Act added by Section 105(a) of the Jumpstart Our Business Startups Act by any broker or dealer that is participating or will participate in your offering.

The JOBS Act significantly changed the rules governing communication between EGCs and certain potential investors. Under the JOBS Act, an EGC, or any person authorized to act on behalf of an EGC, may engage in oral or written communications with potential investors that are qualified institutional buyers or institutional accredited investors to “test the waters” before the EGC files its registration statement. Consequently, the SEC staff has requested copies of such communications.

Other Deloitte Resources

Roadmap, Initial Public Offerings

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.

On August 17, 2017, the Division updated Question 1 of its C&DIs on the FAST Act and added a corresponding C&DI (Question 101.04) to the C&DIs on Securities Act forms to clarify the interim financial information that may be omitted from a draft registration statement submitted by an EGC. For additional information, see Deloitte’s July 11, 2017 (updated August 24, 2017), Heads Up.

For example, the EGC’s total gross revenues do not exceed $1.235 billion in any year during the five-year period, the EGC’s market capitalization does not exceed $700 million (i.e., the EGC does not meet the definition of a large accelerated filer), and the EGC does not issue more than $1 billion in nonconvertible debt in a three-year period (which is not limited to calendar or fiscal years and is a rolling three-year period from the date of the EGC’s last debt issuance).