In order to ensure that issuers start taking advantage of the benefits of the Jumpstart Our Business Startups Act, which became law in April of this year, the Staff of the SEC’s Division of Corporation Finance has published additional guidance to address frequently asked questions about the currently effective provisions in the JOBS Act. On Sept. 28, 2012, the Staff identified a number of frequently asked questions related to Title I of the JOBS Act, which sets out the “IPO on-ramp,” scaled disclosure, and other provisions applicable to companies who can be categorized as an “emerging growth company” or “EGC”. The September FAQs supplement prior guidance issued by the Staff on April 16 and May 3 of this year. The most recent release deals primarily with mergers and exchange offers. Specifically, the September FAQs address:
- The confidential submission process in connection with an exchange offer or merger;
- Financial statement disclosure requirements for emerging growth companies in registration statements and periodic reports; and
- The determination of emerging growth company status.
This advisory provides a brief overview of the Staff’s guidance.
Confidential submission process in connection with an exchange offer or merger
Similar to initial public offerings, an emerging growth company can use confidential “test-the waters communications” with qualified institutional buyers and institutional accredited investors (but not retail accredited investors) in connection with an exchange offer or merger. However, the Staff noted that the JOBS Act did not amend the exchange offer or merger regulatory requirements under the Securities Exchange Act of 1934 (the “Exchange Act”) and as a result, EGCs also must make any filings required under Exchange Act Rules 13e-4(c), 14a-12(b), and 14d-2(b), for pre-commencement tender offer communications and proxy soliciting materials in connection with a business combination transaction.
If an emerging growth company is planning to engage in an exchange offer or merger transaction that will constitute an initial public offering of such EGC’s common equity securities, the EGC may submit a draft registration statement to the Staff. In order to take advantage of this opportunity in connection with exchange offers or mergers (where the registration statement of the emerging growth company acquiror includes a prospectus that also serves as the target company's proxy statement), EGCs must publicly file the registration statement (including the initial confidential submission and all amendments) at least 21 days before the earlier of the road show, if any, or the anticipated date of effectiveness of the registration statement.1
Additionally, in the case of an EGC that commences its exchange offer before the effectiveness of the registration statement, the EGC must publicly file the registration statement (including the initial confidential submission and all amendments) no later than the date of commencement of the exchange offer. All emerging growth companies taking advantage of this provision also must make the required filings under Rule 425 under the Securities Act of 1933 (the “Securities Act”) (unless the EGC is relying on the “test the waters communications” provisions in Section 5(d) of the Securities Act), and Exchange Act Rules 13e-4(c) and 14d-2(b) for pre-commencement tender offer communications. An EGC also must file a tender offer statement on Schedule TO upon commencing the exchange offer.
Financial statement disclosure requirements for emerging growth companies in registration statements and periodic reports
In regard to financial statement disclosure, the Staff has clarified that the JOBS Act gives certain emerging growth companies the option to provide two years of audited financial statements (and corresponding management discussion and analysis disclosure) as opposed to three years in connection with exchange offers or mergers. Specifically, the Staff has taken the position that they would not object to an EGC acquiror that is not a shell company presenting only two years of financial statements of the target in its registration statement for the exchange offer or merger (if the EGC is only presenting two years of its own financial statements in such registration statement), even if the target is not a smaller reporting company. Additionally, the Staff has said they would not object if an emerging growth company presents only two years of financial statements for an acquired business in the Form 8-K, if that registrant is not a shell company and presented only two years of financial statements in its registration statement for its initial public equity offering and has not yet filed three years of financial statements in a Form 10-K.
Although emerging growth companies may present only two years of audited financial statements in connection with the initial public offering of common stock, the Staff has clarified that this option does not extend to Exchange Act registration forms or to offerings of other types of securities. Specifically, in situations where an EGC is required to register a class of securities under Section 12(g) of the Exchange Act, the Staff has taken the position that this registrant must present three years of financial statements in its Exchange Act registration statement. Further, an emerging growth company must present three years of financial statements in connection with an offering of debt securities registered under the Securities Act. However, the EGC registrant need not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public equity offering.
Determining emerging growth company status
A company qualifies as an emerging growth company under the JOBS Act if its initial public offering was or will be completed after Dec. 8, 2011, and it had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. A company’s EGC status terminates on the earliest of:
- The last day of the first fiscal year of the company during which it had total annual gross revenues of $1 billion or more;
- The last day of the fiscal year of the company following the fifth anniversary of the date of the company’s initial public offering;
- The date on which such company has issued more than $1 billion in non-convertible debt during the prior three-year period determined on a rolling basis; or
- The date on which the company is deemed to be a “large accelerated filer” under the Exchange Act, which means, among other things, that it has a public float in excess of $700 million.
When an EGC undertakes a forward acquisition, the Staff takes the position that the successor entity must include, for the purposes of the $1 billion annual revenue test, the acquired company’s revenues from the day after the acquisition date onwards. Further, the five-year anniversary test will be measured from the date of the acquiror’s first sale in its initial public offering. In situations involving a reverse merger, the Staff will look to the operating company’s revenues from the previous year for the purposes of the annual revenue test, and will include the revenues of the combined companies from the day after the merger date onwards. The five-year anniversary test will also be measured from the public company’s first sale in its initial public offering onwards.
In determining EGC status in connection with an initial public offering where the financial statements for the issuer’s most recently completed fiscal year are not included in the issuer’s initial registration statement, the $1 billion annual revenue test should be applied to the most recently completed fiscal year, even though financial statements for that period were not presented in the registration statement. Additionally, the Staff specified that the analysis to determine whether an issuer qualifies as an emerging growth company focuses on whether the issuer, not its parent, meets the requirements of an EGC. Of course, EGC status would be questioned if it appears that the issuer or its parent is engaging in a transaction for the purpose of converting a non-EGC into an EGC for the purposes of obtaining EGC status indirectly when it is not entitled to do so directly.
The Staff also notes a company that had previously conducted an initial public equity offering on or before Dec. 8, 2011, but which is no longer an Exchange Act reporting company, can elect EGC status for its next public equity offering if it remains otherwise qualified. However, issuers that had a registration of a class of its securities revoked under Section 12(j) of the Exchange Act (for failure to comply with the provisions of the Exchange Act or the accompanying rules and regulations), are not eligible to take advantage of the benefits associated with EGC status.
Finally, companies that lose EGC status need not present in subsequent registration statements or periodic reports, selected financial data or a ratio of earnings to fixed charges for periods prior to the earliest audited period presented in the issuer’s initial registration statement.
FOOTNOTE1 We note that, to the extent state corporate law would require notice to be sent or given to security holders on an earlier date, or where the practical need to provide earlier notice to promote the attainment of a quorum or to facilitate the satisfaction of a minimum tender condition, the registration statement must be publicly filed on or before the date first sent or delivered.