CHAPTER 1 The IPO on-ramp T
itle I of the JOBS Act establishes a new process and disclosure regime for IPOs by a new class of companies referred to as emerging growth companies (EGCs). As discussed in the
Introduction, Title I of the JOBS Act was enacted based on the recommendations of the Task Force, which sought ways to improve the offering process as a means for encouraging more IPOs in the United States. As truly the centrepiece of the JOBS Act, Title I contemplates, for those companies that qualify as EGCs, confidential SEC staff review of draft IPO registration statements, scaled disclosure requirements, no restrictions on test-the-waters communications with qualified institutional buyers (QIBs) and institutional accredited investors before and after filing a registration statement, and fewer restrictions on research (including research by participating underwriters) around the time of an offering. Because Title I was retroactively effective to December 9 2011 for issuers that qualified as EGCs, it has had the most significant impact to date on the regulation of capital formation transactions. Given the immediate effectiveness of Title I of the JOBS
Act, the SEC staff provided interpretive guidance in the form of frequently asked questions that are posted on the SEC’s website. The FAQs were initially issued on April 16 2012 and were updated on May 3 2012 and September 28 2012.1
These FAQs are not rules or regulations of the SEC,
but rather reflect the views of the staff of the SEC’s Division of Corporation Finance.
The definition of EGC In order to qualify for the IPO on-ramp contemplated by Title I of the JOBS Act, an issuer must qualify as an EGC, which is determined for the purpose of the reporting, accounting, auditing and corporate governance breaks that the company may use if it went public through a registered securities offering on or after December 9 2011, and for an IPO at any time during the process when the EGC is making use of the Title I provisions.
The $1 billion in revenue test An EGC is defined for the purposes of Title I as an issuer (including a foreign private issuer) with total annual gross
revenues of less than $1 billion (subject to inflationary adjustment by the SEC every five years) during its most recently completed fiscal year.2
The SEC indicates that the
phrase “total annual gross revenues” means total revenues of the issuer (or a predecessor of the issuer, if the predecessor’s financial statements are presented in the registration statement for the most recent fiscal year), as presented on the income statement in accordance with US generally accepted accounting principles (GAAP).3
If a
foreign private issuer is using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as its basis for presentation, then the IFRS revenue number is used for this test.4
Because an issuer must determine its EGC status
based on revenues as expressed in US dollars, the SEC staff indicates that a foreign private issuer’s conversion of revenues should be based on the exchange rate as of the last day of the fiscal year.5
For financial institutions, the SEC
has indicated that total annual gross revenues should be determined in the manner consistent with the approach used for determining status as a “smaller reporting company,” which looks to all gross revenues from traditional banking activities. For this purpose, a financial institution must include all gross revenues from traditional banking activities. Banking activity revenues 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. Revenues do not include gains and losses on dispositions of investment portfolio securities (although it may include gains on trading account activity if that is a regular part of the institution’s activities).6 By way of example, the SEC indicates that, in applying
the revenue test for determining EGC status, a calendar year-end issuer that would like to file a registration statement for an initial public offering of common equity securities in January 2013 (which would present financial statements for 2011 and 2010 and the nine months ended September 30 2012 and 2011) should look to its most recently completed fiscal year, which would be the most
JOBS Act Quick Start 15
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