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The JOBS Act’s IPO On-Ramp: What Directors Need to Know

by Joel Trotter and Alex Cohen, Latham & Watkins LLP

The recently enacted JOBS Act will make IPOs more attractive to both US and non-US companies. Title 1 of the JOBS Act has broad implications for corporate governance, from audit requirements to executive compensation disclosure. Here’s what board members need to know about this section of the JOBS Act.

Title I creates a new category of issuer, called an emerging growth company, or EGC.  EGCs benefit from a transition period, or on-ramp, from private to public company. 

To qualify as an EGC, a company must not have priced its IPO prior to December 9, 2011 and 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;
• its issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities; or
• the last day of the fiscal year ending after the fifth anniversary of its IPO pricing date.

Key Changes to the IPO Process for EGCs
Testing the Waters. 
EGCs and their authorized persons (including underwriters) are permitted to make oral or written offers to qualified institutional buyers and institutional accredited investors before or after the initial filing of a registration statement.

Confidential SEC Submissions.  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 Disclosures.  An EGC may provide two, rather than three, years of audited financial statements at the time of its IPO.

Increased Availability of Research.  The JOBS Act permits research analysts to cover EGCs sooner than under prior law and eases certain restrictions relating to analyst communications  during the IPO process.  However, various requirements with respect to the preparation and issuance of research reports remain in place under the FINRA rules, as well as under the Global Research Analyst Settlement of 2003.  Accordingly, we do not expect that practices with respect to the issuance of research reports will change materially in the near term.

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 phase in gradually. This phased approach will ease the cost of public company compliance.

The on-ramp exemptions for EGCs cover five broad areas:
Section 404(b) of Sarbanes Oxley.  EGCs are exempt from the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley for as long as they qualify as EGCs. Previously, all newly public companies had until their second annual report to comply with Section 404(b). 

CD&A.   EGCs may dispense with the detailed compensation discussion and analysis narrative and instead provide scaled executive compensation disclosure.

Dodd-Frank Compensation Requirements. The Dodd-Frank Act’s requirements for say-on-pay, say-on-frequency and say-on-golden-parachute shareholder votes do not apply to EGCs.  EGCs are also exempt from the Dodd-Frank requirements regarding disclosure of a pay-for-performance graph and CEO pay ratio disclosure.

Extended Phase-In for New GAAP.  EGCs are not required to comply with new or revised financial accounting standards until those standards also apply to private companies. On occasion, this will provide EGCs with more lead time for compliance.

Certain PCAOB Rules. No new rule that the PCAOB may adopt in the future will apply to EGCs unless deemed necessary by the SEC.  This includes possible PCAOB rules regarding mandatory audit firm rotation and auditor discussion and analysis.

About the Authors
Joel Trotter and Alex Cohen are corporate partners in the Washington, DC office of Latham & Watkins.  Mr. Trotter is one of two lawyers who served on the IPO Task Force, whose recommendations gave rise to Title I of the JOBS Act.  Mr. Cohen is the former Deputy Chief of Staff and Deputy General Counsel of the SEC.

Topic tags: board of directors, compensation disclosure & analysis, corporate governance, Dodd-Frank Wall Street Reform and Consumer Protection Act, JOBS Act, PCAOB, Sarbanes-Oxley Act


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