Guidance on Emerging Growth Companies

Q&A with Michael Labriola, Michael Nordtvedt, and Megan Baier, Partners at Wilson Sonsini Goodrich & Rosati LLP.

What is an Emerging Growth Company (EGC)?

Under the Jumpstart Our Business Startups Act (the JOBS Act) (112 P.L. 106, 126 Stat. 306), which was passed in April 2012, a company qualifies as an emerging growth company (EGC) if at the time of its initial public offering (IPO) total annual gross revenues were less than $1 billion during its most recently completed fiscal year. EGC status affords an issuer the ability to enjoy certain reduced disclosure requirements, including providing fewer years of historical audited financials and reduced compensation disclosure, and reduced corporate governance requirements, particularly around internal controls over financial reporting and say-on-pay advisory votes. A company will retain EGC status until the earliest of the:

• Fifth anniversary of the company’s IPO
• Last day of the first fiscal year in which its annual gross revenue exceeds $1 billion
• Date it becomes a large accelerated filer, meaning the last day of the fiscal year in which it (1) has a public equity float held by non-affiliates of $700 million or more (measured as of the last business day of its second fiscal quarter of such year); and (2) has been a reporting company under the Securities Exchange Act of 1934, as amended (the Exchange Act), for at least 12 calendar months
• Date on which the company has issued more than $1 billion in non-convertible debt during the preceding three-year period

Other than excluding certain types of issuers, such as issuers of asset-backed securities and investment companies registered under the Investment Company Act of 1940, there are no restrictions on companies qualifying for EGC status. In addition, companies organized in foreign jurisdictions as well as in the United States can qualify as EGCs.

What are the relevant statutes and regulations governing securities offerings by EGCs?

A securities offering by an EGC is generally governed by the same statutes and regulations as those by non-EGCs, with the exception of the additional provisions of the JOBS Act and the Fixing America’s Surface Transportation Act (the FAST Act) that apply to EGCs. The following key statutes and regulations govern a typical securities offering by an EGC:

• Securities Act of 1933 (the Securities Act) and the rules and regulations promulgated thereunder. The Securities Act regulates the offer and sale of securities, including those of EGCs. Generally speaking, any securities offered or sold in the United States must be registered or otherwise exempt from registration under the Securities Act.
• Exchange Act and the rules and regulations promulgated thereunder. The Exchange Act addresses the ongoing obligations attendant with listing a class of securities on a national stock exchange, including periodic reporting and the initial registration of the class. In addition, a company with a large number of stockholders (excluding holders of most compensatory equity) may also be subject to the reporting requirements of the Exchange Act. Companies (other than banks and bank holding companies or savings and loan holding companies) with either (1) 2,000 or more stockholders or (2) 500 or more stockholders who are not accredited investors are required to register.
• Regulation S-K promulgated under the Exchange Act. This set of rules interplays with the Securities Act forms on which the offering is filed to provide specific disclosure requirements. Regulation S-K is also the framework for non-accounting-specific disclosures in reporting under the Exchange Act.
• Regulation S-X promulgated under the Exchange Act. This set of rules addresses the various accounting-specific disclosures required in Securities Act forms. Regulation S-X is also the framework for accounting-specific disclosures in reporting under the Exchange Act.
• The JOBS Act. The JOBS Act specifically amended the Securities Act and Exchange Act to provide for certain reduced disclosure, reporting, and governance requirements for EGCs. Most notably, the JOBS Act reduced the audited financial statements required in a Securities Act filing from three prior fiscal years to two, deferred internal control reporting for up to five years following an IPO, reduced the executive compensation disclosures required, permitted testing-the-waters communications outside of the offering, and allowed EGCs to review their Securities Act registration statements with the SEC on a confidential basis.
• The FAST Act. The FAST Act further enhanced certain benefits under the JOBS Act for EGCs. Most notably, the FAST Act provided further flexibility for EGCs to begin the SEC review process on Securities Act registration statements without all the required years of audited financial statements if those statements would not be required later when the registrant planned to launch the offering.
• Regulation G promulgated under the Exchange Act. This set of rules addresses a registrant’s use of financial measures not calculated in accordance with generally accepted accounting principles (non-GAAP financial measures). Regulation S-K also addresses the use of non-GAAP financial measures included in a registration statement filed under the Securities Act for an offering by an EGC, but Regulation G extends broadly to any public disclosure of material information made by the registrant that contains a nonGAAP financial measure.
• Regulation FD promulgated under the Exchange Act. This set of rules addresses the selective disclosure of material nonpublic information.
• Regulation M promulgated under the Exchange Act. This often overlooked set of rules addresses the timing of certain purchases and sales by a registrant in its own securities. This is relevant to EGCs that are already listed and may be engaged in any activity, including activity by affiliates, to repurchase its securities at a time proximate to a distribution of securities.

What is the typical process for securities offerings by EGCs, including general steps, timeline, key transaction documents, due diligence process, and required regulatory and stock exchange filings?

The IPO Process for EGCs

EGCs receive key accommodations during the IPO process. The IPO on-ramp contemplated by the JOBS Act relaxed certain regulatory barriers that policy-makers believed were keeping EGCs from accessing the public markets. These accommodations include, among other benefits, confidential submission and review of IPO registration statements, reduced financial statement audit and disclosure requirements, and the ability to engage in oral or written test-the-waters communications with certain types of sophisticated investors before filing a registration statement with the Securities and Exchange Commission (SEC). This response focuses on the IPO process for an EGC, which is the principal point in its lifecycle where an EGC first benefits from its differentiated status as an EGC.

To read the full practice note in Lexis Practice Advisor, follow this link.

Michael Labriola is a partner working in Wilson Sonsini Goodrich & Rosati's Washington, D.C., and New York City offices, where he counsels public and private technology and emerging growth companies through all stages of their growth. His practice focuses on corporate and securities law, including general corporate representation, public offerings, venture capital financings, and mergers and acquisitions. Michael Nordtvedt is a partner at Wilson Sonsini Goodrich & Rosati, focusing on the representation of public and private technology, medical device, and life sciences companies through all stages of their growth, as well as investment banks and venture capital and private equity firms. Michael specializes in corporate and securities law, including general corporate representation, public offerings, private placements, and mergers and acquisitions. Megan Baier is a partner at Wilson Sonsini Goodrich & Rosati, specializing in corporate and securities transactions, with a focus on the life sciences, health care, and technology sectors. She also has considerable experience counseling publicly held companies on general corporate representation, SEC compliance, disclosure matters, and complex securities law issues. Assistance provided by Mark Bass, Keegan Drake, and Michael Moesel, Wilson Sonsini Goodrich & Rosati LLP.

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