JOBS Act and Emerging Growth Companies

The JOBS Act created the EGC framework to lower the IPO disclosure burden for smaller fast-growing companies. The framework has reshaped how nearly every U.S. IPO is structured.

EGC Definition and Disqualification

An EGC is a relatively new public company whose size has not yet crossed any of three statutory thresholds.

• EGC status persists for up to 5 fiscal years following the IPO
• EGC status is lost on the last day of the fiscal year in which the issuer reaches:
  • 1.235 billion dollar in annual gross revenues (the current SEC-indexed inflation cap), OR
  • Large accelerated filer status (typically achieved at 700 million dollar or more in public float), OR
  • More than 1 billion dollar of non-convertible debt issued in the prior 3 years

The three triggers are alternatives, not cumulative. An EGC that crosses any one of them loses EGC status the day the threshold is crossed for the fiscal year.

Exam Tip: Gotchas

• The 1.235 billion dollar revenue cap is indexed for inflation every 5 years. Earlier sources may still quote 1.07 billion dollar; that number is stale. The current cap is 1.235 billion dollar.
• EGC status is lost on three alternative triggers, not a single test. Revenue, large-accelerated-filer status, or 3-year debt issuance can each end the status independently.
• The 5-year clock runs from the IPO. Even an EGC that never crosses the size thresholds loses status five fiscal years after the offering.

Test-the-Waters Communications

The test-the-waters mechanism lets an EGC gauge institutional interest in an offering before or after filing, without violating the pre-filing offer prohibition.

• An EGC may communicate with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) before or after filing a registration statement to gauge interest in an offering
• The communication can be oral or written
• The mechanism is broader than the WKSI free-writing exemption (works for non-WKSI EGCs) but narrower in audience (only QIBs and IAIs, not retail)

Test-the-waters communications are how an EGC's deal team validates investor demand before committing to a full registered IPO. If demand is weak, the issuer can pull the deal without having filed a public registration statement.

Exam Tip: Gotchas

• EGC test-the-waters is limited to QIBs and IAIs. Retail investors cannot be solicited during test-the-waters; that audience must wait for the standard waiting-period marketing tools (red herring, road show).
• The test-the-waters mechanism applies before AND after filing. The communication does not have to be timed to the pre-filing window.

Confidential Submission

EGCs can keep the registration statement out of public view during the SEC review process.

• An EGC may submit a draft registration statement to the SEC for confidential nonpublic review
• The public filing must occur at least 15 days before the issuer commences its road show
• Subsequent revisions and SEC comment letters during the confidential review process are also nonpublic

The 15-day public-filing requirement gives the market a meaningful window to digest the disclosure before institutional accounts begin taking indications of interest on the road show.

Exam Tip: Gotchas

• Public filing must be at least 15 days BEFORE the road show begins. This is the only hard publicity deadline in the confidential-submission framework.
• The confidential-submission benefit is unique to EGCs and certain foreign private issuers. Non-EGC domestic issuers cannot use it.

Scaled Disclosure

EGCs qualify for a package of scaled-disclosure accommodations that reduce IPO and ongoing disclosure burden.

• Two years (instead of three) of audited financial statements in the IPO registration statement
• Reduced executive-compensation disclosure (compensation discussion and analysis (CD&A) and certain compensation tables can be omitted or scaled back)
• Exemption from auditor attestation of internal controls over financial reporting (the auditor opinion required of larger public companies on the design and operation of internal controls)
• Permits use of forward-looking financial information in research reports during a registered offering, within the broader research-safe-harbor framework
• Continued exemption (in some cases) from certain accounting-standard transition timelines

The package is meaningful to issuers' cost and timeline. Reducing audited financials from 3 years to 2 years, removing one audit opinion (the internal-controls attestation), and scaling back executive-compensation drafting can meaningfully accelerate an IPO.

Exam Tip: Gotchas

• Two years of audited financials is the EGC accommodation; non-EGCs file three years. A common exam fact.
• The internal-controls audit exemption applies only as long as EGC status persists. Once status is lost, the next annual report must include the auditor's attestation on internal controls.
• Scaled disclosure is a package, not a single rule. Candidates should be able to list the four main accommodations: 2 years of audited financials, scaled executive-compensation disclosure, internal-controls audit exemption, and forward-looking research carve-out.

Think of it this way: the EGC framework is a five-year onboarding ramp into full public-company disclosure. The new issuer files less at the IPO, talks to QIBs more freely before and after filing, and confides in the SEC during review. As the company grows past one of the three triggers (revenue, float, debt), the accommodations fall away one by one, and the company joins the standard reporting tier.