Highway on-ramps: you’ve probably driven on them thousands of times and never given them another thought. But it turns out that they are marvels of engineering.
In this installment we are summarizing a legislative marvel: the IPO on-ramp provisions of the JOBS Act, which was signed into law nearly one year ago, on April 5, 2012. The law – which grew out of the recommendations of the IPO Task Force on which Latham’s Joel Trotter served as one of two securities lawyers – passed with overwhelming bipartisan support and in record time. Now that’s something you don’t see every day.
What Is the IPO On-Ramp?
The IPO on-ramp refers to Title I of the JOBS Act. Title I of the JOBS Act creates a new category of issuer, called an emerging growth company, or EGC. To qualify as an EGC, a company must have annual revenue for its most recently completed fiscal year of less than $1.0 billion. A company will remain an EGC until the earliest of:
- the last day of any fiscal year in which it earns $1.0 billion in revenue;
- the date when it qualifies as a “large accelerated filer,” with at least $700 million in public float;
- the last day of the fiscal year ending after the fifth anniversary of its IPO pricing date; or
- its issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities.
EGC status is generally unavailable to any public company that priced its IPO on or before December 8, 2011.
What Are Some of the Key Changes to the IPO Process for EGCs?
- Testing the Waters. Before or after filing a registration statement, EGCs may meet with qualified institutional buyers and other institutional accredited investors to gauge their interest in a contemplated offering.
- Confidential SEC Review. EGCs may initiate the IPO registration process confidentially. However, an EGC must publicly file its initial submission and all amendments at least 21 days prior to conducting its traditional IPO road show marketing process.
- Scaled Financial Disclosure. EGCs may go public using two years, rather than three years, of audited financial statements and as few as two years, rather than five years, of selected financial data.
- Increased Availability of Research. The JOBS Act permits research analysts to cover EGCs sooner than under prior law and eased some of the ministerial restrictions on analyst communications during the IPO process. Practices in this area continue to develop. Although pre-deal research on EGC IPOs has not emerged, analysts now routinely publish research reports on newly public EGCs as much as 15 days earlier than under prior law for IPOs and during some previously blacked-out periods immediately following EGC secondary offerings.
What are the Elements of the IPO On-Ramp?
As long as an issuer continues to qualify as an EGC, it will benefit from the IPO on-ramp, during which its regulatory requirements as a public company phase in gradually. This phased approach eases the cost of public company compliance.
The on-ramp exemptions for EGCs cover four broad areas:
- Internal Controls Audit. EGCs are exempt from the internal controls audit required by Section 404(b) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).
- Executive Compensation. EGCs may use streamlined executive compensation disclosure and are exempt from the shareholder advisory votes on executive compensation required by Dodd-Frank.
- Extended Phase-In for New GAAP. EGCs may use private-company phase-in periods for new accounting standards.
- PCAOB Rules. EGCs are exempt from any Public Company Accounting Oversight Board rules that, if adopted, would mandate auditor rotation or auditor discussion and analysis.