The JOBS Act and the Capital Raising Process (The Permanent On Ramp)

The JOBS Act creates a new class of companies,"emerging growth companies," and exempts them from a host of regulatory requirements.  An emerging growth company is defined as "an issuer that had total annual gross revenues of less than $1,000,000,000 . . . during its most recently completed fiscal year." 

The idea behind the provision appears to be that a company will be more willing to go public because the regulatory consequences of doing so will be reduced.  Once, however, the company grows to a certain size (over $1 billion or becomes a large accelerated filer) or issues a certain amount of debt ($1 billion in non-convertible debt over a three year period), it will lose its status as an emerging growth company and thereafter be required to conform to all of the requirements of the securities laws.

Growth in the business, of course, cannot be predicted with any certainty, but at least some of the emerging growth companies will permanently stay below the requisite thresholds.  Nor will they achieve the requisite size to meet the definition of large accelerated filer or issue the requisite amount of debt.  As a result, the only way in those circumstances to cease to be an "emerging growth company" is to do an equity offering and wait five years.  Indeed, the status will be lost on the fifth anniversary after "the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement."

The provision, therefore, contemplates that a company will go public by way of an IPO and get a pass for no more than five years.  But what if a company becomes public but never does an equity offering?  Under Section 12(g), companies are subject to the securities laws (including the periodic reporting requirements) whenever they have more than $10 million in assets and, after the JOBS Act, 2000 shareholders of record (or 500 unaccredited investors).   In other words, they can be required to file periodic reports and a public market can develop in their shares without ever having undertaken an equity offering.  Indeed, it is not uncommon for companies to register under Section 12(g) voluntarily (for example to qualify for trading in the OTC Bulletin Board) without even meeting the asset/shareholder of record test in the statute. 

Likewise, the statute does not apply to companies that sold equity shares pursuant to "an effective registration statement under the Securities Act of 1933" on or prior to December 8, 2011.  This suggests that only companies going public after that date will qualify as an emerging growth company.  But in fact, any company that is public and under $1 billion will qualify so long as it has not done an equity offering. 

To the extent that companies become public other than through the filing of a registration statement, they can remain an emerging growth company indefinitely.  Of course, the time period is triggered not by an IPO, but any offering of equity "pursuant to an effective registration statement".  Thus, the period will begin to run when an offering is registered on behalf of employees or selling shareholders. 

Nonetheless, companies that refrain from equity offerings can retain the status of "emerging" growth company indefinitely.  This, of course, may prove very confusing to investors since similarly situated companies may be subject to very different regulatory regimes.   

J Robert Brown Jr.