Introduction to Emerging Growth Companies
The Jumpstart Our Business Startups Act, or JOBS Act, introduced the concept of Emerging Growth Companies (EGCs) to facilitate capital formation for smaller companies. An EGC is defined as a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year.
The EGC designation provides relief from certain regulatory requirements, allowing these companies to focus on growth and development. To qualify as an EGC, a company must also have less than $700 million in public float, which is the aggregate market value of its outstanding common equity held by non-affiliates.
Revenue and Public Float Thresholds
The revenue threshold for EGCs is adjusted annually for inflation. As of the latest adjustment, the revenue threshold remains at $1.07 billion. This means that companies with revenues below this threshold may be eligible for EGC status, provided they meet the public float requirement.
The public float threshold is also an important consideration for EGCs. Companies with a public float of $700 million or more do not qualify as EGCs, regardless of their revenue. This ensures that larger companies do not take advantage of the reduced regulatory requirements intended for smaller companies.
Disclosure Requirements for EGCs
As EGCs, companies are exempt from certain disclosure requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. For example, EGCs are not required to provide a compensation discussion and analysis in their proxy statements, nor must they conduct say-on-pay votes.
However, EGCs are still required to file periodic reports with the SEC, including annual reports on Form 10-K and quarterly reports on Form 10-Q. These reports must include financial statements and management's discussion and analysis of the company's financial condition and results of operations.
Financial Reporting Requirements
EGCs are required to provide audited financial statements in their registration statements and periodic reports. However, they are exempt from the requirement to provide an auditor's attestation of their internal control over financial reporting (ICFR) under Section 404(b) of the Sarbanes-Oxley Act.
This exemption can result in significant cost savings for EGCs, as they do not need to invest in the implementation and maintenance of ICFR. Nevertheless, EGCs must still maintain effective internal controls and disclose any material weaknesses in their internal control over financial reporting.
Conclusion and Next Steps
In conclusion, the EGC designation offers significant benefits for smaller companies, including reduced regulatory requirements and cost savings. To determine whether your company qualifies as an EGC, you should consult with a qualified corporate lawyer or accountant.
If your company meets the revenue and public float thresholds, you may be eligible for EGC status. It is essential to understand the disclosure and financial reporting requirements that apply to EGCs and to ensure compliance with all relevant regulations to maintain this status.
Frequently Asked Questions
What is the main purpose of the Emerging Growth Company designation?
The main purpose of the EGC designation is to facilitate capital formation for smaller companies by providing relief from certain regulatory requirements.
How often are the revenue thresholds for EGCs adjusted?
The revenue thresholds for EGCs are adjusted annually for inflation to ensure that the thresholds remain relevant and effective.
What is the public float threshold for EGCs?
The public float threshold for EGCs is $700 million, which is the aggregate market value of outstanding common equity held by non-affiliates.
Are EGCs required to provide audited financial statements?
Yes, EGCs are required to provide audited financial statements in their registration statements and periodic reports.
What is the benefit of the auditor's attestation exemption for EGCs?
The exemption from the auditor's attestation of ICFR can result in significant cost savings for EGCs, as they do not need to invest in the implementation and maintenance of ICFR.
How long does a company remain an Emerging Growth Company?
A company remains an EGC until it exceeds the revenue or public float thresholds, or until it has been an EGC for five years, whichever comes first.