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Thursday, April 5, 2012

Update (2:45 PM): As expected, President Obama has signed the JOBS Act into law.

The JOBS Act is expected to be signed by President Obama today. According to the Act, it is intended:

To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

The Act includes provisions relating to crowdfunding, access to capital markets, exemptions to encourage small company capital formation, increased private company shareholder threshold for registration, and reduced public company compliance and disclosure burdens for “emerging growth companies.”

In addition, Title I of the Act “ Reopening American Capital Markets to Emerging Growth Companies,” includes changes to executive compensation disclosure requirements for emerging growth companies.

Emerging Growth Company. An emerging growth company means a company with total annual gross revenues of less than $1 billion (indexed for inflation). Only companies with an IPO after December 8, 2011 can qualify as an emerging growth company. The company loses status as an emerging growth company upon the earliest of:

  • the last day of its fiscal year in which its annual gross revenues are $1 billion or more;
  • the last day of its fiscal year five years after its IPO;
  • the last day of its fiscal year in which it has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or
  • the date it is deemed to be a “large accelerated filer.”

Executive Compensation. An emerging growth company is exempt from the following requirements:

  • the say on pay advisory vote; and
  • the say on golden parachute advisory vote.

Once the company no longer qualifies as an emerging growth company it must include a say on pay advisory vote not later than:

  • the date three years after its IPO (if the company was an emerging growth company for less than 2 years); and
  • the date one year after it is no longer an emerging growth company (if the company was an emerging growth company for 2 or more years).

Emerging growth companies are also exempt from the following Dodd-Frank required disclosures (once the rules are adopted):

  •  “pay versus performance” – required disclosure of the relationship between compensation actually paid and company financial performance; and
  •  “pay ratios” – the ratio of the median annual total compensation of all employees (except the CEO) compared to the CEO’s annual total compensation.

An emerging growth company may also qualify as a “smaller reporting company” for purposes of scaled executive compensation disclosures available to smaller reporting companies under current rules.

Other Title I Provisions. Title I includes a number of other provisions for emerging growth companies including: reduced financial disclosures, delayed application of certain accounting pronouncements, the availability of confidential treatment for a period of a draft registration statement, relief from certain internal controls audits, and a transition period for certain auditing standards.

Opt-In Right. An emerging growth company may choose to not take advantage of these new exemptions and instead comply with the requirements for a non-emerging growth company. However, the decision to opt-in must be made at the time of the IPO, is all or nothing (no cherry picking), and the company must continue to comply with the non-emerging growth company standards for as long as it remains an emerging growth company. In other words, if an emerging growth company opts-in, there is no opting-out.

Regulation S-K. Title I also requires the SEC to review Regulation S-K and report to Congress within 180 days as to how to streamline the registration process.

Takeaway. The Act eases the reporting and compliance burden for emerging growth companies giving them easier access to public capital markets. Unlike other portions of the Act, the emerging growth company provisions are effective upon enactment. As a result, pre-IPO companies will want to move quickly to work with counsel to determine whether and how to take advantage of this new relief and the requirements for maintaining emerging growth company status.

Related Links

Bryan Cave Corporate Finance and Securities Group Client Alert on the JOBS Act

BankBryanCave.com Post on the JOBS Act (Update June 8)

SEC FAQs on the JOBS Act

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