[author: David Jenson]

The latest batch of Frequently Asked Questions regarding topics of general applicability under Title I of the JOBS Act – questions 42-54 – were released by the SEC on September 28, 2012.  Title I of the JOBS Act contains provisions relating to qualification as an emerging growth company (EGC), “test the waters” communications with certain investors, and scaled disclosure requirements for EGCs, “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.”

A number of the questions (see 45, 46, 49, and 50) ask whether an EGC that has prepare only two years of audited financial statements in connection with an IPO of common equity securities can later be required to provided audited financial statements for an earlier period (i.e., a period prior to the earliest year included in the two years of audited financials).  The answer is typically “no.”  Filing two years of audited financials in connection with an IPO of common equity securities locks in, for some purposes at least, the earliest date for which audited financials will be required.

Here are the highlights:

An EGC can use the confidential draft registration statement procedure with respect to a merger or exchange offer that constitutes its initial public offering (IPO), and the rules relating to “test the waters” communications with qualified institutional buyers and institutional accredited investors allow such communications in the context of mergers or exchange offers. (Questions 42 and 43)

Question 44 provides guidance on disclosure requirements when an EGC has used the confidential draft registration statement submittal process with respect to an exchange offer or merger that constitutes its initial IPO of common equity securities, and you should visit the FAQ page directly for the details.

Question 47 provides guidance regarding how to determine if any of the EGC disqualifications are triggered following a forward acquisition or a reverse merger, based on the presentation of the constituents in post-transaction financial statements.  The SEC provides a useful chart in its answer, and you should take a look at the chart for further detail. (Question 47)

The scaled disclosure requirements under Section 7(a)(2)(A) of the Securities Act, which allow an EGC to present only two years of audited financial statements (instead of three), to comply with the smaller reporting company version of Item 402 of Regulation S-K, and to avoid SOX 404(b) auditor attestations in connection with a registration statement for its IPO of common equity securities, do not apply where the EGC’s IPO is of debt securities, rather than equity securities, nor do they apply when registration of a class of securities by an EGC is required because of it has more than 2,000 shareholders or more than $10 million in assets.  However, after an EGC has conducted an IPO of common equity securities and presented only two years of audited financials, the SEC “would not object if the emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its IPO of common equity securities.”  (Question 48 and 49)

Similarly, if an EGC loses its EGC status, such that it would technically be required to provide selected financial data and the ratio of earnings to fixed charges in its registration statements and periodic reports, the SEC would not object if the former EGC failed to provide data for any period prior to the earliest period for which audited financials were provided when it was an EGC. (Question 50)

A subsidiary of a parent company can qualify as an EGC when the parent itself does not qualify as an EGC, even when the parent newly forms a subsidiary and transfers an existing business into the subsidiary for the purpose of conducting an IPO.  However, “the emerging growth company status of an issuer may be questioned if it appears that the issuer or its parent is engaging in a transaction for the purpose of converting a non-emerging growth company into an emerging growth company, or for the purpose of obtaining the benefits of emerging growth company status indirectly when it is not entitled to do so directly.”  It’s unclear exactly what this means, but the SEC counsels that issuers with specific questions on this point should contact the Office of the Chief Counsel for guidance. (Question 53)

If a company held an IPO of common equity securities prior to December 8, 2001 and was formerly an Exchange Act reporting company, but has since ceased to be a reporting company, and would now qualify as an EGC but for the prior IPO of common equity securities, the SEC will allow the company to take advantage of all of the benefits of an EGC notwithstanding the prior IPO. (Question 54)

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