Jumpstart Our Business Startups Act
Frequently Asked Questions

Generally Applicable Questions on Title I of the JOBS Act

April 16, 2012

The Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted on April 5, 2012. In these Frequently Asked Questions, the Division of Corporation Finance is providing guidance on the implementation and application of the JOBS Act, based on our current understanding of the JOBS Act and in light of our existing rules, regulations and procedures. These FAQs are not rules, regulations or statements of the Commission. Further, the Commission has neither approved nor disapproved these FAQs.

These FAQs address questions of general applicability under Title I of the JOBS Act. Title I provides scaled disclosure provisions for emerging growth companies, including, among other things, two years of audited financial statements in the Securities Act registration statement for an initial public offering of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting. Title I also enables emerging growth companies to use test-the-waters communications with QIBs and institutional accredited investors and liberalizes the use of research reports on emerging growth companies.

For information about the confidential submission of emerging growth company draft registration statements, please refer to the Division announcement regarding confidential submission of draft registration statements under the JOBS Act .

(1) Question:

How can an issuer determine whether or not it meets the revenue test for “emerging growth company”?

Answer:

An “emerging growth company” is defined in the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year. The phrase “total annual gross revenues” means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).  If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues for purposes of this test should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year. In addition, if the financial statements for the most recent year included in the registration statement are those of the predecessor of the issuer, the predecessor’s revenues should be used when determining if the issuer meets the definition of an emerging growth company.

(2) Question:

How can an issuer determine whether it qualifies as an “emerging growth company” as of the effective date for the definition of that term?

Answer:

Section 101(d) of the JOBS Act provides an “effective date” for the definition of emerging growth company: an “issuer shall not be an emerging growth company for purposes of [the Securities Act and the Exchange Act]…if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.” The phrase “first sale of common equity securities” in the JOBS Act is not limited to a company’s initial primary offering of common equity securities for cash. It could also include offering common equity pursuant to an employee benefit plan on a Form S-8 as well as a selling shareholder’s secondary offering on a resale registration statement.

Even if the issuer had a registration statement declared effective on or before December 8, 2011, so long as the first sale of common equity securities occurs after December 8, 2011, an issuer may qualify as an emerging growth company, assuming the other requirements of the definition are satisfied.

(3) Question:

When would a company determine whether it is an emerging growth company for purposes of the various provisions in Title I?

Answer:

Current Commission rules do not address when emerging growth company status should be determined or provide for any transition into or out of emerging growth company status. Absent rule changes, we will apply the following general principles, based on current rules and on the language of Title I:

A company must qualify as an emerging growth company at the time of submission in order to submit a confidential draft registration statement, or any amendment thereto, under Securities Act Section 6(e). If a company ceases to qualify as an emerging growth company while undergoing the confidential review of its draft registration statement – for example, since the initial submission date, a fiscal year has been completed with revenues over $1 billion – it would need to file a registration statement to continue the review process and comply with current rules and regulations applicable to companies that are not emerging growth companies. At that time, the prior confidential draft submissions would be filed as exhibits to the registration statement (see Question 10, Confidential Submission Process for Emerging Growth Companies).

Securities Act Rule 401(a) provides that “the form and contents of a registration statement and prospectus shall conform to the applicable rules and forms as in effect on the initial filing date of such registration statement and prospectus.” The date of the initial confidential draft submission is not the “initial filing date” for these purposes since it is not the filing of a registration statement. Under Rule 401(a), a company’s status at the time of the initial filing date of its registration statement will determine the requirements for the contents of that registration statement. If a company files its registration statement at a time when it qualifies as an emerging growth company, in accordance with Rule 401(a), the disclosure provisions for emerging growth companies would continue to apply through effectiveness of the registration statement even if the company loses its emerging growth company status during registration. Conversely, if a company submits a draft registration statement for confidential review at a time when it qualifies as an emerging growth company, but files its initial registration statement at a time when it does not qualify as an emerging growth company, then the initial registration statement would need to comply with the requirements applicable to registration statements filed by companies that are not emerging growth companies.

For purposes of Securities Act Section 5(d) test-the-waters communications, a company would need to determine whether it qualifies as an emerging growth company at the time it engages in communications in reliance on Section 5(d). For example, if a company made test-the-waters communications in reliance on Section 5(d) before filing a registration statement at a time when it qualifies as an emerging growth company, but is no longer an emerging growth company at the time it files a registration statement, we would not view the earlier communications as a violation of Section 5. Further test-the-waters communications in reliance on Section 5(d), however, would not be permitted if the company no longer qualifies as an emerging growth company. The same approach would apply to the research reports described in amended Securities Act Section 2(a)(3).

(4) Question:

How should an emerging growth company identify itself as an emerging growth company in a draft registration statement submitted to the staff on a confidential basis under Securities Act Section 6(e) and in the subsequent electronic filing of the registration statement on EDGAR?

Answer:

The issuer should disclose that it is an emerging growth company on the cover page of its prospectus.

(5) Question:

May an issuer that qualifies as an emerging growth company amend its registration statement to provide the scaled disclosure available to emerging growth companies if the registration statement was initially filed prior to April 5, 2012?

Answer:

Yes.  The emerging growth company may provide the scaled disclosure available to emerging growth companies in a pre-effective amendment to a pending registration statement or in a post-effective amendment.

(6) Question:

An emerging growth company completed its initial public offering after December 8, 2011 and prior to April 5, 2012. May this company file its next periodic report using the scaled disclosure provisions in Title I?

Answer:

Yes.

(7) Question:

Is an emerging growth company required to follow all of the scaled disclosure provisions for emerging growth companies set out in Title I, or may it comply with some of the scaled disclosure provisions and some of the regular disclosure requirements?

Answer:

Other than the accounting standards referenced in Section 7(a)(2)(B) of the Securities Act and Section 107(b) of the JOBS Act (addressed in Question 13 below), an emerging growth company may decide to follow only some of the scaled disclosure provisions for emerging growth companies.

(8) Question:

May a foreign private issuer that qualifies as an emerging growth company comply with the scaled disclosure provisions available to emerging growth companies to the extent relevant, even though the JOBS Act refers only to Regulation S-K and does not refer to the corresponding items in Form 20-F?

Answer:

Yes, the staff will not object if a foreign private issuer that qualifies as an emerging growth company complies with the scaled disclosure provisions available to emerging growth companies to the extent relevant to the form requirements for foreign private issuers.

(9) Question:

A foreign private issuer qualifies as an emerging growth company and is also entitled to submit its draft registration statement on a non-public basis pursuant to the Division’s policy on Non-Public Submissions from Foreign Private Issuers. In this situation, will the foreign private issuer be required to publicly file its confidential submissions at least 21 days before the road show?

Answer:

If the foreign private issuer chooses to take advantage of any benefit available to emerging growth companies, then it will be treated as an emerging growth company and will be required to publicly file its confidential submissions at least 21 days before the road show. If the foreign private issuer chooses not to take advantage of any emerging growth company benefit, then it may follow the Division’s policy on Non-Public Submissions from Foreign Private Issuers.

(10) Question:

May a Canadian issuer filing under the Multi-Jurisdictional Disclosure System (“MJDS”) qualify as an emerging growth company if it satisfies the requirements of the definition of emerging growth company?

Answer:

Yes. While the disclosure requirements for this Canadian issuer would continue to be established under its home country standards in accordance with the MJDS, other provisions of Title I, such as the test-the-waters provision in Section 5(d) of the Securities Act and the deferral of compliance with Section 404(b) of the Sarbanes-Oxley Act, would be available to an MJDS filer that qualifies as an emerging growth company.

(11) Question:

How many years of financial data need to be included under Item 301 of Regulation S-K in the initial public offering registration statement of an emerging growth company?

Answer:

Securities Act Section 7(a)(2)(A) provides that an emerging growth company need not present more than two years of audited financial statements in a registration statement for an initial public offering of its common equity securities. This section also provides that, “in any other registration statement to be filed with the Commission, an emerging growth company need not present selected financial data in accordance with section 229.301 of title 17… for any period prior to the earliest audited period presented in connection with its initial public offering.” Although Section 7(a)(2)(A) refers to “any other” registration statement, we will not object if an emerging growth company presenting two years of audited financial statements in its initial public offering registration statement in accordance with Section 7(a)(2)(A) limits the number of years of selected financial data under Item 301 of Regulation S-K to two years as well.

(12) Question:

How many years of audited financial statements are required to be included in an emerging growth company’s registration statement other than the registration statement for its initial public offering of common equity securities?

Answer:

The provision in Securities Act Section 7(a)(2)(A) permitting the filing of only two years of audited financial statements is limited to the registration statement for the emerging growth company’s initial public offering of common equity securities. Although the provision is limited to the initial public offering registration statement, we will not object if, in other registration statements, an emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities.

(13) Question:

If an emerging growth company chooses not to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards, when is the emerging growth company required to make that decision, and how should that be communicated to the Commission?

Answer:

Section 107(b)(1) of the JOBS Act provides that an emerging growth company “must make such choice at the time the company is first required to file a registration statement, periodic report, or other report with the Commission” and to notify the Commission of such choice. Although emerging growth companies that are submitting their draft registration statements on a confidential basis will not be required to file a registration statement until at least 21 days before the road show, they should notify the review staff of their choice in their initial confidential submission, as that choice will inform the staff’s review of the financial statements in the draft registration statement. Emerging growth companies that currently are in registration or are subject to Exchange Act reporting should make and disclose their choice in their next amendment to the registration statement or in their next periodic report, respectively.

Note that Section 107(b)(2) provides that any decision to opt out of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards is irrevocable.

(14) Question:

If an emerging growth company chooses to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards, what type of disclosure should be included in its registration statement or periodic report prior to the adoption of such standards?

Answer:

SAB Topic 11M provides disclosure guidance with respect to recently issued accounting standards that will be adopted by the registrant in a future period. SAB Topic 11M specifies that one of the disclosures that should generally be considered by a registrant is the effective date of such standards. For each recently issued accounting standard that will apply to its financial statements, an emerging growth company that chooses to take advantage of the extended transition periods should disclose the date on which adoption is required for non-emerging growth companies and the date on which the emerging growth company will adopt the recently issued accounting standard, assuming it remains an emerging growth company as of such date.

(15) Question:

Until the Commission amends the form requirements, Regulation S-X and Regulation S-K to be consistent with the disclosure provisions for emerging growth companies as set forth in Title I of the JOBS Act, how should emerging growth companies handle any conflict between the disclosure provisions in Title I and existing rules and regulations?

Answer:

An emerging growth company may comply with Title I’s disclosure provisions in its registration statements, periodic reports and proxy statements, even if doing so would be inconsistent with existing rules and regulations. The disclosure provisions in Title I supersede, in relevant part, existing rules and regulations.

For example, we note that Section 102(c) of the JOBS Act, which was not enacted as part of the Exchange Act, provides that an emerging growth company may comply with Item 402 of Regulation S-K by providing only the information required of a smaller reporting company, even if it does not qualify as a smaller reporting company. In addition, Section 103 of the JOBS Act, which also was not enacted as part of the Exchange Act, provides that an emerging growth company is not required to comply with the requirements of Sarbanes-Oxley Section 404(b).

An emerging growth company’s CEO and CFO are required to certify in their Sarbanes-Oxley Act Section 906 certifications that the company’s periodic report fully complies with the requirements of Sections 13(a) or 15(d) of the Exchange Act. We view compliance with Sections 102(c) and 103 of the JOBS Act as being consistent with full compliance with the requirements of Sections 13(a) or 15(d) of the Exchange Act.

(16) Question:

In addition to presenting its own financial statements, an issuer may be required to present up to three years of financial statements of other entities in its registration statement, based on the significance of those entities (e.g., financial statements of acquired businesses and equity method investees under Rules 3-05 and 3-09 of Regulation S-X, respectively). How many years of financial statements must be presented for these entities if an emerging growth company presents only two years of financial statements pursuant to Section 7(a)(2)(A) of the Securities Act?

Answer:

If the significance test results in a requirement to present three years of financial statements for these other entities, we would not object if the emerging growth company presents only two years of financial statements for these other entities in its registration statement. This approach is similar to how smaller reporting companies report the financial statements of businesses acquired or to be acquired pursuant to Rule 8-04(c) of Regulation S-X.

(17) Question:

Securities Act Section 2(a)(19)(C) provides that an issuer may lose its emerging growth company status on the “date on which such issuer has during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt,” provided that none of the other disqualifying conditions in Section 2(a)(19) have been triggered. How is the 3-year period measured, and what constitutes “non-convertible debt”?

Answer:

The 3-year period covers any rolling 3-year period. It is not limited to completed calendar or fiscal years. As of any date on which an issuer has issued more than $1 billion in non-convertible debt over the three years prior to such date, the issuer will lose its status as an emerging growth company, provided that none of the other disqualifying conditions have been triggered.

“Non-convertible debt” means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not.